Study: Fraud losses, management eat up more than one-fifth of retailer revenue

Merchants’ fraud costs are a growing expense — and the pace shows no sign of slowing.



Fraud losses and management eat 8% of the average e-commerce retailer’s revenue, up from 7.6% in 2016, according to “2017 Financial Impact of Fraud Study: Exploring the Financial Impact of Fraud in a Digital World.” The report is from Vesta Corp. and Javelin Strategy & Research.



Merchants who sell only digital goods, like eBooks, eTickets and other instant download items have been the hardest hit. Fraud operations account for 9.7% of revenue, and their fraud spend increased by 42% year over year.



Compared to 2016, chargeback losses — which occur when merchants end up footing the bill for legitimate consumer or fraudster purchases — increased by 60% among digital goods merchants. This jumps to 75% among those merchants selling strictly physical goods.



Meanwhile, false positives — which occur when merchants mistakenly decline legitimate transactions — grew by 25% among digital goods merchants, and 27% among physical goods merchants.



The average e-commerce merchant now devotes 21% of its operational costs to fraud management, up from 18% in 2016. Overall, the average retailer’s fraud management spend increased 17% in 2017.



"Merchants' fraud costs continue to rise year over year," said Javelin Research director Al Pascual. "While some merchants have experimented with new fraud fighting tools and tactics, on the whole, they haven't been able to keep pace with dynamic fraudulent threats.”



Looking ahead to the next 12 months, e-commerce retailers plan to utilize at least 14 different payment security techniques and solutions to combat fraudulent purchase attempts.



"The writing is on the wall," explained Vesta chief marketing officer Tom Byrnes. "If merchants don't modernize their fraud protocols, they won't be focused on growth or innovation; they'll be struggling to stay in business."