Fraud will cost you—a lot.
Unfortunately for merchants here in the Asia Pacific region (APAC) and everywhere else, fraud is only growing more prevalent. The numbers are alarming in APAC. According to the 2022 Global Fraud & Payments Report, 61% of merchants in the region reported higher rates of identity theft. The same study also found a 142% increase in account takeovers (ATO) in the region, while Ravelin uncovered a 52% increase in promo abuse, which is currently the fastest-growing type of fraud. Fraud is getting more sophisticated as well, with as much as 25.9% of APAC website traffic in 2021 attributed to ATO bad bots.
The same is true for the region’s FinTech space, where USD $17.8 billion in digital payments are processed every year. Such a huge amount makes the FinTech space a prime target of fraudsters, who are always looking to exploit legacy infrastructure, lack of payment status visibility and the introduction of new, oftentimes flawed, payment schemes. A case in point would be Singapore, which reported over 15,000 scam cases in 2020 alone—costing Singaporean FinTechs some SGD $32 million.
In short, the cost of fraud can be huge. And it’s not just because of the actual incidents of fraud that make it so costly. There are other factors that add to the cumulative cost of fraud, and these costs are as follows:
- False declines. The mere suspicion of fraud, which is the main reason 2.6% of all orders are declined to begin with, can cost companies a lot. According to the AITE, in fact, merchants lose up to 75 times more to false positives than to legitimate fraud, with the losses caused by sunk marketing costs, overhead and reputational damage, among others. That translates to 3% of a company’s revenue, lost due to false declines. At that rate, false declines will be costing businesses globally around USD $429 billion based on the USD $14.3 trillion projected e-commerce revenue by 2023. False declines will cost merchants about three times more than fraud itself. It’s an easy way to push your customers into the hands of competition and regaining those real customers will most likely be difficult.
- Lost clients. Customers are increasingly relying on e-commerce nowadays, with 56% of consumers in Indonesia, for instance, admitting their preference to buy things online, followed by 50% of consumers in Thailand, 37% in Singapore, 34% in Australia, and 27% in Hong Kong. That preference is only rising, and firms trying to enhance their fraud detection processes may invariably wind up denying real customers for fear of getting defrauded. In other words, if the business is putting out too much friction due to fear of fraud and declining real customers (a.k.a. false positives), they are not just catching fraud but losing revenue from real customers. Even FinTech companies, considered as being more cutting-edge than traditional financial institutions, are losing customers due to fraud—or, specifically, to added friction that drags out processes needlessly and is likely to turn off customers, according to a report by PYMNTS.
- Lost inventory. Inventory gutted by fraudulent transactions will cost a merchant big time in different ways. There are obviously the costs of chargebacks. It is also possible that low stocks for real customers expecting faster delivery won’t be available, resulting in poor service that may potentially lead to loss of clients.
- Degraded customer lifetime value. Ironically, being cautious about fraud can result in a company subjecting customers to lots of unnecessary friction, like cumbersome verification and repetitive identification. At some point, even your loyal customers will grow tired of such a process, even if it’s an anti-fraud thing. When that happens, a loss of existing customers inevitably follows. That also implies sunken marketing costs. Just calculate how much did you spend on customer acquisition? How much are you spending on the post-sales processes? If this is a customer that has a big basket and upselling opportunity – that’s another cost to think of.
- Costly chargebacks. A chargeback is essentially the process of returning the amount of a transaction after a customer disputes or returns the item. And contrary to popular belief, a chargeback is actually as costly as offsetting just one loss, it is not as simple as selling an additional item. Instead, you will need to sell, on average, 11 similar products to compensate for the one you lost due to fraud. That is not to mention the potential fines that online platforms might impose on your business if it exceeds a 1% chargeback rate—a rate that can even get you dropped from said platforms. For more concrete values, consider the rising value of a dispute (that generally leads to a chargeback). According to Sift’s latest findings, the cost of a dispute is continuously rising, starting at USD $219.58 in 2019 to USD $241.99 in 2020 to USD $293.04 in 2021. No wonder that in 2020 Mastercard reported that firms lost about USD $50 billion due to chargebacks.
Come to think of it, a case or two of fraud every year might not necessarily be disastrous to your bottom line. But fraud is rarely ever an isolated incident. It can happen repeatedly, and the cumulative impact will surely be considerable. In addition, you might think—often mistakenly—that you are not being targeted or are not being victimised by it. But there’s a good chance that you are, especially if you are growing and tapping into other markets. But even if, let’s say, you don’t have fraud because you have very high fraud barriers, just calculate how much you might be losing on declining good customers. If that’s a significant number, maybe you need to use a different approach to catching fraud.
In such cases, what you might think are insignificant, isolated losses can snowball into something bigger—something that will send your business crashing. This ever-growing threat of fraud is the reason you need to think of what your current payment provider or fraud platform can provide in terms of safeguarding you from fraud. It is time to ask the hard questions:
- Is my provider or platform giving me the kind of fraud security I need today?
- Do I need additional layers of security—identity data, for instance—to help mitigate all the challenges discussed above?
As you ponder on these challenges and hard questions, you can click on the following link to find out how you can combat fraud while effectively balancing customer strategic friction.
