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Ecommerce - Credit Card Fraud Costs and Statistics

If online credit card fraud scares consumers, then it absolutely terrifies merchants! While consumers have some protection against fraud, fraudulent credit card transactions are costing ecommerce merchants many millions of dollars annually. 

When we hear about credit card fraud, it is usually regarding consumers who have felt the sting of "social engineers" and hackers. I published an article on this subject after my credit card was compromised in 2002. In June 2005, MasterCard International reported a security breach of a 3rd party credit card processing company that threatened the details of 40 million cardholders of all card types. Since then, there's been dozens of other minor and major breaches.

What is 'social engineering'? It's a method of getting people to comply to your wishes - such as revealing your credit card number and other personal details. The strategies used I won't mention here for obvious reasons!

My experience was more frustrating than anything else and this article is more about the other end of the spectrum. After a discussion with a major ecommerce retailer in 2002, I learned just how widespread this problem was. 

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During our discussion I was informed that this particular  merchant experiences a very high rate of attempted fraudulent online purchases. The figures for this merchant showed that:

"Overall rejected orders total about 70-80% on all worldwide internet transactions over the period of a year. In the U.S., Australia, Canada, British Isles & western Europe about 50%. Orders from countries in some eastern European countries such as Romania, etc. are 100% fraudulent."

Percentages vary from industry to industry and merchant to merchant. Just to clarify, what this merchant reported isn't indicative of global averages or that *all* transactions originating from Romania are fraudulent. It was just that merchant's experience at that point in time.

When we read about credit card fraud from the merchant's perspective, the numbers mentioned are usually figures showing transactions that result in a chargeback fee to the merchant - they don't tend to reflect the attempted frauds. In some of the online businesses I've worked in, I've seen attempted fraud as high as 50% of all orders.

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Counting the cost of fraud.

There are a couple of winners when it comes to fraud... the people perpetrating the fraud of course, and the credit card issuing banks. The fees involved with chargebacks are horrendous - US$ 30 and upwards per transaction! Additionally, if you experience a high rate of fraud, you may wind up paying higher processing fees or have your merchant account terminated altogether. After being terminated, it's very difficult to gain processing services elsewhere. Proper fraud screening is critical in not only saving money, but it can also save your business.

What is a chargeback?

Essentially, a chargeback fee occurs when a cardholder disputes the sale at their card issuing bank. The card issuing bank sends through a chargeback to recover money for their cardholder. The merchant agrees to pay a chargeback fee for each chargeback that bank deems valid. 

In order to boost online credit card usage, credit-card companies usually limit customer liability to only $50, some none at all. All it takes is for a customer to claim that the transaction was fraudulent and then the merchant could be liable for the hefty chargeback fee. The merchant must raise prices in order to remain financially viable.

The ecommerce merchant I spoke with had a number of checks in place to reduce attempted fraud before payment processing takes place. But this kind of order and payment verification comes at a price, which inevitably must be passed on to their customers.

According to some industry analysts, fraud cost USA ecommerce merchants over over 2.6 billion dollars during 2004. Learn more about preventing and challenging chargebacks

Read on to the next part of this article to learn some strategies in how you can protect your online business from credit card fraud.

Further learning resources

Payment Gateways and Merchant accounts - a beginners guide

Preventing and challenging chargebacks

Michael Bloch
Taming the Beast
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