Merchant Credit Card Fraud: a $33 Billion Problem in 2020?
Credit card fraud is a well-known problem. That said, discussion of these attacks tend to focus on the impact of fraud on consumers, while downplaying the impact of merchant credit card fraud losses.
Merchants in the US are expected to see roughly $33 billion in payment card fraud losses in 2020. Of course, that projection was made before the outbreak of the COVID-19 crisis; as a result, the real figure is likely to be much higher. What’s at the core of this problem? Why is it so hard to keep fraud under control, and what can merchants do to protect themselves?
Taking a Closer Look at Merchant Credit Card Fraud Losses
We tend to think of fraud as a monolithic issue. However, understanding merchant credit card fraud means recognizing that payment fraud isn’t a distinct or specific tactic. Instead, it could cover any situation in which a person uses a credit card without the cardholder’s knowledge or permission to make a purchase with a merchant.
The fact that fraud is so nebulous is part of the problem. For instance, a bad actor might use stolen cardholder information to create a copy of a legitimate card, then use that counterfeit to make purchases in-store. Or, a fraudster might possess a genuine card that was stolen from the original cardholder. These card-present threats have different warning signs, yet they are both cases of credit card fraud.
The good news is that the introduction of technologies like EMV chip cards, NFC terminals, mobile wallets, and more advanced fraud mitigation tools have minimized risk in card-present channels. At the same time, though, much fraud activity has moved online, with fraudsters embracing new tactics to avoid detection.
Because of the security tools mentioned above, a practice like using a counterfeit card can be harder to pass-off. The physical credit card is not present in remote channels, though, making it inherently more difficult to verify the cardholder’s identity. Thus, card-not-present fraud tactics are generally a much more serious problem in today’s market.
A cardholder will often know right away if a credit card goes missing. This will give the cardholder a chance to freeze or cancel the card before it’s used.
In the card-not-present space, though, a fraudster could acquirer a cardholder’s information, complete a transaction, then vanish. The cardholder may not know what happened until it’s already too late.
The average merchant will lose $3.36 for every $1 of fraud in 2020.
Take action now before it’s too late.
Merchants Pay the Price for Fraud
As mentioned earlier, merchant credit card fraud losses are expected to surpass $33 billion in 2020. This occurs after the cardholder identifies the fraud, then contacts the bank that issued the credit card in question to file a chargeback.
The 2020 True Cost of Fraud™ study finds that merchants will lose $3.36 per every $1 of fraud. This is because merchants are liable for more than just the cost of the initial sale after a chargeback. They’re also on the hook for:
- The cost of any merchandise already shipped.
- Additional fees assessed by the acquirer to cover chargeback costs.
- Lost overhead and customer acquisition costs.
- Long-term liabilities, such as loss of processing privileges if chargebacks get out of hand.
Merchants tend to view some number of monthly chargebacks as a “cost of doing business.” In truth, they do bear some culpability: by allowing a criminal to complete a sale, the merchant has failed to conduct due diligence and is responsible for the incident.
The best way to minimize merchant credit card fraud losses from criminal activity is to deploy a dynamic strategy. This calls for adopting a variety of complementary tools and practices, including:
- Address Verification Service (AVS)
- CVV Verification
- Proxy Piercing
- Device Fingerprinting
- Velocity Limits
- Fraud Scoring
When Fraud Occurs AFTER the Sale
What is often overlooked, however, is that not all merchant credit card fraud losses are the result of criminal activity. We’re seeing more and more chargeback claims connected to friendly fraud, as opposed to conventional criminal fraud.
Friendly fraud occurs when a cardholder requests a chargeback from the card-issuing bank without a valid reason to do so. There are various reasons why cardholders do this. For instance, some buyers genuinely don’t understand what they’re doing, and file a chargeback without intending it; others file chargebacks due to buyer’s remorse, while still others are deliberately trying to get something for free.
This is a serious problem that merchants can’t afford to ignore. In fact, a recent study conducted by Fraud.net found that friendly fraud occurred 50% more often than criminal attacks. The same study reported that a 1% reduction in legitimate sales resulting from friendly fraud could translate to a 25% reduction in overall profits.
Plus, the problem is getting worse: merchant credit card fraud losses from chargeback abuse keep growing year after year at a rate of roughly 20%. What makes friendly fraud so hard to combat is the fact that it is post-transactional in nature: merchants can’t identify it beforehand using conventional criminal fraud mechanisms.
The only way to recoup friendly fraud losses is through the representment process. So, how does that fit into a conventional fraud strategy?
A New Paradigm for Fraud
We mentioned the need for a dynamic strategy regarding fraud. How can a strategy be called “dynamic,” though, if it isn’t responsive to new and developing threats like friendly fraud?
The key is machine learning.
For the most positive impact, the fraud tools merchants employ should be interconnected using machine learning. This will provide more reliable data, enabling merchants to identify new and developing threats. Armed with this knowledge, merchants can separate chargebacks based on their primary, fundamental source—merchant error, criminal fraud, or friendly fraud—and respond appropriately.
The merchant can prevent criminal attacks, then dispute the remaining friendly fraud chargebacks. This is the best approach to eliminate the possibility of merchant credit card fraud in every form.
Have additional questions about criminal fraud? Want to learn more about chargeback representment? Click below to speak with one of our qualified chargeback experts today.