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The Impact of Fraud Beyond Direct Financial Losses

Because eCommerce fraud is already painful with the reversal of funds, chargeback fees and lost product, the indirect costs are often ignored or are just an afterthought. Recent studies show the lasting impact payment fraud has on consumers, merchants and issuers, indicating that the cost of fraud continues beyond the initial loss. Increasing fraud has also influenced organizations’ budgets, with chargeback and risk management costs representing as much as twenty percent of a merchant’s operational expenditure, according to Javelin Strategy and Research.

Polling consumers in early 2016, a recent study found that consumers have lasting reactions after experiencing fraudulent charges on their credit or debit cards that can impact either or both the card issuing bank and merchant involved. This online shopper survey was conducted by Sparks Research in partnership with Tender Armor CvvPlus, and reached over 1,000 consumers. The survey found that 56 percent of cardholders will react to a fraud event, either by closing payment card accounts, reducing the frequency they shop online or decreasing the use of any payment cards overall.

The most common reaction to unauthorized charges on a cardholder’s account is to close the card or account, which 15 percent of consumers said they have done. An additional 3 percent added that even though they were sent a replacement card they decided to never activate or use it. It’s not just issuers that can see a residual impact from fraud, it’s merchants too. Consumers are next most likely to say they will no longer do business with an online retailer that was implicated in the fraudulent purchase on their payment card, at 14 percent. While many consumers will avoid a retailer after a major data breach, this response can be more due to misinformation or confusion in cases where a card compromised elsewhere was used against a given merchant. This merchant who was just dealt a fraud loss, however, may now also lose a customer for life.

This study also found that fraud just doesn’t impact the merchant and issuer involved, but how the consumer participates in online commerce and card-based payments overall. Among consumers that experienced credit or debit card fraud, 12 percent became less likely to shop online after the fraud event, and an additional 12 percent used the replacement card less than before, whether online or in-store.

Beyond the direct financial loss of fraud there are residual impacts that lead to less orders or processing volume for merchants and issuers, and growing fraud has also increased how much organizations are spending to detect and prevent it. A late 2015 study conducted by Javelin and sponsored by Vesta measured risk management spending across different types of organizations. The survey found that 14 percent of all operational expenses were related to fraud and chargeback management amongst merchants selling only physical goods, while merchants selling just digital good were allocating 20 percent to of their operational budgets risk management. Growing fraud has led to merchants increasing both risk management budgets and staff. Both physical and digital goods merchants report that personnel costs are where the most of the risk management expenditure goes, at 36 and 41 percent, respectively.

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