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E-Commerce Math Gone Wild: Why the Overreliance on Anti-Fraud Software Is Bad for Business

By Monica Eaton-Cardone, cofounder & COO of Chargebacks911

Would you spend $132 to hire a security guard, to protect $100 worth of store merchandise? Or pay a $6,600 insurance premium on a $5,000 car?

Of course not. It wouldn’t make any sense: The cost of protection would be 132 percent greater than the value of what you’re protecting. Yet this is exactly what thousands of online merchants are doing, in a misguided attempt to protect themselves from the scourge of cyber-fraud.

Last year, US-based online merchants lost $8.6 billion in revenue to false declines (i.e., refusing to process legitimate transactions from valid credit cards and debit cards), while successfully preventing $6.5 billion in fraudulent transactions. The overwhelming majority of these false declines were triggered by automated anti-fraud software. For many merchants, this software was their only means of self-defense.

Note the numbers: $8.6 billion in legitimate transactions lost; $6.5 billion in illegitimate transactions saved. The amount of revenue lost through false declines was 132 percent greater than the sum-total of fraud prevented.

In other words, the anti-fraud software barred more legitimate transactions than fraudulent ones!

Had they done absolutely nothing, merchants would’ve pocketed an additional $2.1 billion.

Bluntly stated, it’s a horribly misguided business strategy. On every conceivable level, the metrics don’t make any sense. Anti-fraud software is good, but relying solely on anti-fraud software is bad. You still need human oversight, or you’ll end up throwing the baby out with the bathwater.

Last year, my company, Chargebacks911, safeguarded over 2.4 billion online transactions in 87 countries. While analyzing 2016 cyber-fraud statistics, I became increasingly concerned that an overreliance on security software could eventually lead to industrywide catastrophe.

Simply put, it’s not a sustainable trajectory.

Online companies must generate a positive ROI, or they’ll go the way of Pets.com, GeoCities and AOL. An overreliance on fraud-filters kills an e-store’s margins. It’s a strange phenomenon, because Internet merchants are fanatically data-driven about so many decisions, but when it comes to fraud prevention, there’s a blind spot. The numbers just don’t add up.

It’s a case where the medicine is worse than the disease.

Even more troubling, JP Morgan Chase has reported that the frequency of chargeback issuances is now growing at a rate of 20 percent annually. Fraudulent chargebacks, commonly known as “friendly fraud” in the e-commerce industry, is one of the fastest-growing categories of cyber-fraud. Merchants lose $40 billion annually to chargebacks, compared to just $2.7 billion to identity fraud.

But whereas the frequency of chargeback issuances is rising by 20 percent annually, the number of online transactions is increasing by 7 percent. This means that the rate of fraud is outpacing the overall rate of industry growth.

This is particularly problematic, because chargeback fraud is notoriously difficult to detect with most anti-fraud software.

Regrettably, merchants are inadvertently contributing to the problem by misusing their security software. The algorithms were designed to spot suspicious activity, like identity fraud. Chargeback fraud is more subjective. Instead of using the software for precautionary purposes, it’s being used as a universal cure-all, and that’s increasing the false-positives.

The only long-term solution is reforming American banking policies, principally the Fair Credit Billing Act of 1974, but in the short-term, e-stores should seek third-party experts who can spot the differences between true fraud and suspicious activities, and mitigate transactional disputes with consumers and banks. Anti-fraud software can be an effective first-line of defense, but it can’t be your only line of defense.

Because, at a minimum, the solution must make things better – not worse.

Chargebacks911 is the first global company fully dedicated to mitigating chargeback risk and eliminating chargeback fraud. A division of Global Risk Technologies, Chargebacks911 is headquartered in Tampa Bay, Florida, with offices throughout North America, Europe and Asia. To learn more about Chargebacks911, please visit chargebacks911.com or call 877.634.9808.


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