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The Business Journals: Online Merchant Fraud Costs Rise

By Raymond Pucci
October 27, 2016
in Analysts Coverage
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Online merchants are caught in a perfect storm that is battering their bottom lines. As the following article describes, E-commerce sales are becoming increasingly attractive to fraudsters.

Criminals are increasingly doing their crooked shopping online as chip readers become more common at brick-and-mortar stores.

Fraud is particularly expensive for online merchants who must pay the cost of dishonest transactions. Even false reports of fraud cost merchants extra — about 30 percent of all transactions that are declined due to suspected fraud are believed to be legitimate.
Every merchant segment is spending more of their operational costs on managing fraud, compared with spending in 2015. Digital goods merchants worry the most about increases in fraud, with almost half of digital goods merchants saying their concerns about fraud have increased over the past year. Their worries are largely tied to the constant changes in criminals’ tactics.

The credit card industry revealed a plan on Tuesday asking online sellers to give card issuers more customer information, according to The Wall Street Journal. Card issuers will now accept customer email addresses, billing, and shipping details as ways to verify a purchase is authentic. Currently, merchants only send the purchase amount and the name of the business for authorization.

Another solution the credit card industry is pushing is tokenization, a type of encryption that generates a number that validates a customer’s identity, replacing account numbers and expiration dates, the WSJ added. This would help in cases when a merchant’s payment system is hacked and credit card numbers are stolen.

E-commerce is becoming the channel of choice for many shoppers. Unfortunately the EMV transition drives many cybercriminals to use card-not-present (CNP) transactions as their modus operandi. Small and medium-sized merchants have limited resources to deal with fraud on their own and must rely on security solutions providers. While an added expense, merchants will quickly realize the favorable return-on-investment. Where should merchants look for solutions? There are many CNP fraud specialists that use highly effective machine-learning, anti-fraud methods. Additionally, merchant acquirers typically provide fraud management as an added value service or at least partner with a dedicated security firm that deals with online fraud.

Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group

Read the full story here

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