While staying ahead of fraud is something all online merchants face, those who distribute goods and services digitally face higher fraud losses than merchants in other product categories, with fraud loss accounting for 1.5% of accepted orders versus an average 1.2% among all online merchants. According to CyberSource Corp.’s 9th annual Online Fraud Report, fraud loss also represented 1.8% of online revenue, compared to 1.3% among all merchants it surveyed.
“The fraud rates are higher for digital merchants in general, and part of that is the unique nature of the goods. When you have a physical piece of merchandise you have more time to assess the transaction before you deliver it and at the end of the day, you have someone signing for it,” says Lauren Wang, market manager for media, entertainment and telecom at CyberSource. “With digital distribution, you have an e-mail address. A lot of the tools for identifying fraud aren't applicable for digital delivery of goods and services.”
Digital merchants, which distribute products such as games, digital entertainment and event tickets online, also reject a higher percentage of U.S. and Canadian orders because of suspicion of fraud: 4.9% versus 3.9% for all other merchants, CyberSource says. They reject fewer orders from outside North America because of suspicion of fraud than other merchants do—9.1% of orders compared to 11.9%—but overall, sent more orders into manual review, reviewing 40% of all orders manually versus an average of 31% among all merchants.
“Digital merchants have a higher proportion of international customers, which may impact the way they approach order reviews,” says Paul Brock, senior manager of managed services at CyberSource, and author of the CyberSource report “Fraud benchmarks and best practices: Digital merchants.”
Though they sent more orders overall into manual review, digital merchants were less likely to challenge chargebacks on transactions rejected by the card issuer. Only 54% of digital merchants said they re-submit chargebacks, versus 80% of all merchants. However, when they did challenge chargebacks, digital merchants were more likely to win, with an average win rate of 55%, versus an average 40% for all other merchants, according to CyberSource’s data .
Doug Schwegman, director of worldwide customer and market intelligence at CyberSource, explains that the chargeback system as originated in the early days of mail order and telephone order retailing required merchants challenging fraudulent transactions to prove that the customer actually received the goods. “Customers couldn’t claim a fraudulent transaction if you could show a FedEx delivery sheet, signed, with the right address. Digital merchants have a more difficult time doing that, though they can sometimes show date stamps, time stamps and use geolocation devices,” he says.
CyberSource also speculates that the higher success rate among digital merchants who do challenge chargebacks could indicate that digital merchants are cherry-picking the transactions they challenge to select only those they think they have the best chance of winning. It’s a strategy that could make sense if the chargeback is on a $200 software download, less so on a 99-cent music download, according to Brock. On the other hand, he says, “I know of one client that experimented with re-presenting all of its chargebacks during a month, and it gained $40,000 as a result."
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