Fraud tarnishes ecommerce gleam

Ecommerce has experienced exponential growth in recent years, but there is a dark side to the phenomenon: returns and chargebacks also are on the rise. A new report from the advisory firm Datos Insights suggests ecommerce merchants in the United States and UK are experiencing spikes not just in returns overall, but also in returns classified as fraudulent.

Global retail ecommerce sales reached an estimated $5.8 trillion in 2023, according to the website Statista, and are expected to exceed $8 trillion by 2027. Boston Consulting Group predicts ecommerce will capture 41 percent of global retail sales by 2027, up from just 18 percent in 2017.

"While ecommerce is gradually reverting to its pre-COVID trajectory, the landscape has undergone a notable and lasting transformation," stated Martin Barthel, a partner and managing director at BCG. "The rivalry between emerging and established incumbents has heightened, driven by the purchasing patterns of Baby Boomers and Gen X, who collectively wield substantial influence over today's ecommerce sales."

Merchants bear burden of fraudulent sales

The bad news is that a lot of consumers are scamming the system, leveraging consumer protection laws to their advantage, and to the detriment of merchants.

Datos found that half of merchants it surveyed in the United States and UK see 10 percent to 20 percent of total ecommerce transactions returned; 30 percent saw returns on 20 percent to 35 percent of ecommerce transactions. "This high return rate significantly impacts operational costs and profit margins," researchers noted in their report From click to conflict: unraveling the complex world of ecommerce disputes.

Making matters worse, a significant share of returns are abusive or outright fraud. Twenty-one percent of merchants reported that over half of their returns are abusive or fraudulent, leading them to adjust refund policies.

A return is considered abusive, for example, when a customer purchases two items with different prices, then switches the packaging and returns the cheaper item as the high-priced item. More traditional, outright fraud can include situations in which the consumer claims the purchase was never authorized, or received, when in fact it was.

Many merchants use dispute avoidance and chargeback avoidance solutions. However the research suggests the perceived effectiveness is mixed. Only 21 percent of U.S. merchants and 15 percent of UK merchants find them very effective, Datos Insights reported.

Not all merchants equipped to deal with fraud

First-party fraud, sometimes euphemistically referred to as friendly fraud, is rampant, but all merchants are not equipped to deal with it, Datos Insights wrote. Only about 50 percent of merchants have tools to detect first-party fraud. The absence of these tools further disadvantages merchants since it means they are apt to lack the necessary documentation needed to refute such claims, the consultancy noted.

"Merchants have limited defenses in these disputes today, which leaves them vulnerable and exposed, ultimately undermining trust in ecommerce transactions," said Dennis Gamiello, executive vice president at Mastercard.

Mastercard, is stepping up to help merchants combat first-party fraud. Its First-Party Trust program, set to launch this fall, is an artificial intelligence-powered service that allows merchants to share information about first-party misuse.

Merchants can submit information at the time of purchase or once a dispute arises. Mastercard's AI and risk modeling tools use the data to identify and bolster a merchant's case against dishonest chargebacks. If the data suggests first-party misuse, the card issuer can even present the data to the customer to see if they want to cancel their claim.

"The program gives issuers the data and confidence to have that sort of conversation with the cardholder," said Sandy Condellire, Mastercard senior vice president. "And we can spare the merchant, who has been overburdened with the cost of friendly fraud to date."

Visa, too, has taken action to fight this type of fraud. Visa Compelling Evidence 3.0 (CE3.0), a program launched in 2023, allows merchants to present evidence in response to a chargeback claim detailing previous transactions that prove a disputed transaction was in fact legitimate.

Whether you want to upgrade your POS offerings, find a payment gateway partner, bone up on fintech regs or PCI requirements, find an upcoming trade show, read about faster payments, or discover the latest innovations in merchant acquiring, The Green Sheet is the resource for you. Since 1983, we've helped empower and connect payments professionals, starting with the merchant level salespeople who bring tailored payment acceptance and digital commerce tools, along with a host of other business services to merchants across the globe. The Green Sheet Inc. is also a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals.

Notice to readers: These are archived articles. Contact information, links and other details may be out of date. We regret any inconvenience.