Here are 4 reasons why fraud prevention is an indispensable tool for e-commerce.
Running an e-commerce business is not a simple task. Many entrepreneurs are under the illusion that the absence of a physical structure makes maintaining an online store inexpensive. However, there are a number of inherent costs to running an efficient and healthy operation. One of them is fraud prevention, which is often seen as a "bad" tool that undermines a site's conversion and serves "only" to block suspicious orders. But it's not quite like that...
Of course, if your e-commerce is being targeted by fraudulent purchases and the number of chargebacks is starting to worry you, it’s time to hire a fraud prevention system. However, a risk system should go beyond that and will only be truly effective if it can maximize the conversion of an e-commerce, approving as many orders as possible while maintaining the lowest risk rate.
Next, Konduto will show you four proofs that fraud prevention is an indispensable tool for an online store.
But first, why is it important to have fraud prevention?
Simple answer: to prevent fraud from occurring and consequently reduce losses from chargebacks – which happen when a customer does not recognize a purchase and requests a refund from the bank or credit card company.
There are some aggravating factors here: in e-commerce, it is the merchant who bears the loss from chargebacks (not the banks or credit card companies). Additionally, there is no specific legislation regarding online fraud, leaving stores unprotected and without legal support.
It’s hard to imagine an e-commerce without a fraud prevention system after knowing this, right? But as promised, we want to present you with four more reasons why fraud prevention is so important for an online store. Let’s go?
1. Avoid unnecessary logistics costs
In addition to bearing the cost of the product, the shipping cost also counts towards the refund for a merchant.
Shipping a fraudulent order means paying for embedded and indirect transportation costs, such as in-house staff or the amount paid to a carrier. Always remember to calculate these indirect costs, including every cent!
Also consider costs with packaging, labels, plastics, boxes… expenses that seem trivial but add up.
2. Do not cancel legitimate sales
It is common that when identifying a significant number of frauds in your e-commerce, you want to urgently resolve the problem and, as a result, adopt a strict policy for approving orders.
But there is a negative consequence to this attitude: canceling legitimate sales due to undue suspicion. The percentage of attempted fraud in Brazilian e-commerce has varied between 2% and 4% in recent years; if your cancellation rate is much higher than that, you are certainly losing money.
3. Protects your store's credibility
This is not a direct financial loss, but putting your store's credibility at risk due to a high number of frauds is not a good idea.
Imagine a real consumer having their order denied due to an extremely strict system? In addition to losses, this generates frustration.
Once again, blocking many orders does not mean your e-commerce is more protected. On the contrary: it may mean you are missing out on sales and wasting all the investment in marketing campaigns...
4. Avoid entering a chargeback program
Credit card companies allow an e-commerce to have a fraud rate below 1% of gross revenue. Once your online store exceeds this percentage or fails to meet the parameters set by these companies, you may become part of a chargeback program.
If you do not maintain acceptable percentages regarding fraud, your e-commerce will be considered a higher risk and a notification will be sent with a deadline for you to improve your metrics until you return to standard.
If the percentage does not decrease, your e-commerce may face fines (high ones, in dollars!) or even be disqualified from credit card companies. In a scenario where a large portion of online purchases is made using this payment method, losing it is a huge loss for your online store. Do you agree?
But then, how to overcome the damages caused by fraud?
Our tip is prevention. Fraudsters are constantly updating and committing increasingly imperceptible frauds to the average consumer. Moreover, their actions are not isolated cases.
Thus, there are clear difficulties for e-commerce to act against fraud without the help of specialized fraud prevention companies. As we have seen in this article, the losses generated go beyond financial ones and can be avoided!