Fraud is a big deal. The average profit for ecommerce businesses is 2%, and the average fraud rate for the industry is 0.09%. In other words, fraudulent claims consume about 4.5% of industry profits: an estimated $3.5 billion lost to online fraud.
Small businesses are at even greater risk. Not only are small businesses less sophisticated in detecting fraud, but small businesses generally lack the resources – time and expertise – to do a good job of processing fraudulent claims. In fact, businesses under $5MM often do not bother tackling fraud at all, and swallow fraudulent claims as a cost of doing business.
But there’s good news, too. No matter what size your business, there are easy steps you can take to reduce the impact of fraud on your bottom line.
Watch out for these two main types of fraud:
- Credit card fraud, and
- Friendly fraud, returns, and credits requests.
If you’ve selected a reputable payment gateway (there are over 70 ecommerce gateways), chances are that your credit card processing company is already doing a pretty good job scanning for credit card scams. Standard features include asking for CVC codes, matching addresses, and validating numbers against their database to see if the card number has been flagged in the past.
The key here is make sure your business is working with a company that has a strong track record in fraud prevention, keeps your customer’s details secure, and gives your customers the confidence to transact with you online. So even though most people associate fraud with fake credit card numbers, credit requests actually comprise the majority (58%) of fraud claims.
In other words, the highest exposure to fraud is occurring due to subpar customer communications, not malicious intent.
Proactive merchants can take a more disciplined approach to combatting chargebacks to reduce profit-eroding claims. Typical examples include:
- Customer didn’t recognize the business name on their credit card statement, so customer reversed the charges
- Item isn’t what the customer ordered, or doesn’t work/fit/look as promised
- Return policy was unclear so customer did a chargeback instead of taking the time to return the item
- Item was damaged during shipment
- Customer couldn’t track the package in progress, so customer cancelled the order before it arrived
- Item was delivered, but customer was unaware of delivery (someone else signed for package)
Here are steps merchants can implement to immediately reduce the incidence of these types of claims.
1. Ensure the name and description on the credit card statement matches the name of the online store where the customer made the purchase (example: Dave’s Flowers or www.davesflowers.com, not DFCo.) This is especially true for small businesses that may not have high brand recognition, or are operating as a DBA. Customers are less likely to reverse a charge they recognize.
2. The easiest way to reduce returns is to start with great product descriptions, photos, videos, and reviews.
- Writing great product copy is an art form, but at its simplest level product copy must deliver an authentic and realistic description. Customers who receive exactly what the product copy promises are less likely to return items.
- Clear return policies (and ease of returns) might not prevent returns, but they will cut back on chargebacks. Admittedly, the business takes the hit on unpacking and re-shelving, but a modest return shipping fee (or better yet, free returns) encourages customers to “do the right thing” instead of a merely reversing the credit card charges.
3. Tightly integrate purchase data with fulfillment tracking. Customers who believe they have not received their package, or who can’t access shipment tracking are more likely to cancel an order. At a minimum, your shipping provider must provide package tracking to customers. Merchants must be able to quickly access inventory, fulfillment, and shipment tracking data to respond promptly and efficiently to damage or non-delivery claims.
Even if your business doesn’t have an API integration between your online store and all of your logistics partners, creating a well-defined plan to track your inventory as it moves from vendor to vendor to customer is a critical step to reducing time and money spent on claims. By focusing on these areas – select payment gateways with best in class fraud prevention techniques, use a consistent brand name across all customer communications, write great product and return copy, and tightly integrate your order and fulfillment tracking – your business can significantly reduce fraud occurrences.
Fraud will never go away, but you can reduce your profit loss and protect your business from preventable fraud claims.