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In 2023 alone, merchant losses to e-commerce fraud reached US$38 billion globally, and are predicted to reach US$91 billion by 2028. Merchants in the US and Canada incurred a cost of $3 for every $1 of fraud in the same year. So what’s the state of the art in fraud for digitally delivered goods — and what can retailers do to avoid becoming another fraud statistic?
It's a story that plays out with shocking regularity. A seller of digitally-delivered goods, like an online course provider, delivers an order of educational materials worth $2,000. Then, surprise - they're suddenly hit with a chargeback after the client has downloaded their content.
This is a case of "friendly fraud": the user initiates a chargeback by, for example, claiming that the course content was unsatisfactory. They get their money back, leaving the provider holding the bag for the losses. Nothing "friendly" about this fraud at all!
With consumers spending ever more on digitally-delivered goods - from premium phone apps to eBooks to games and VR content — we're likely to see more providers falling victim to these scams.
So what's the state of the art in fraud for digitally delivered goods - and what can retailers do to avoid becoming another fraud statistic?
Fraud for digitally-delivered goods on the rise
In 2023 alone, merchant losses to e-commerce fraud reached US$38 billion globally, and are predicted to reach US$91 billion by 2028. Merchants in the US and Canada incurred a cost of $3 for every $1 of fraud in the same year.
Fraudulent transactions cost APAC merchants $4 per transaction - adding up to around 5% of lost revenue per year in the region
A considerable amount of revenue is on the line given that US adults spend up to $130 per month on digital goods, entertainment and services according to a Deloitte survey on consumer spending. Because these products are digital, they cannot be "returned," leaving the retailer with losses that cannot be recovered. In most cases, the online retailer must not only refund the buyer, they'll also incur chargeback fees and be charged higher fees for processing each payment, if the card network puts you in a high-fraud target category.
It's an uphill battle now for businesses, who must now fight increasingly sophisticated (and rapidly-evolving) fraud methods. To adapt to this new reality, retailers must embrace strategies that are specific to the digital, reproducible nature of their products; and ensure that only legitimate customers can access purchased content.
Chargeback causes - error or outright fraud?
Chargebacks happen - by 2026, experts project that the annual global chargeback volume will reach 337 million cases. To fight chargeback-driven fraud at the source, businesses should be able to distinguish whether each chargeback can be attributed to criminal fraud, "friendly fraud", or simple merchant error.
1. Criminal fraud
Criminal fraud resulting in stolen digital goods comes in many different flavours. There's CNP (card not present) fraud, which happens when stolen credit card information is used to purchase items, digital or otherwise. When the legitimate cardholder notices the unauthorised charge, they report it to the bank, which initiates a chargeback.
Then there's account takeover (ATO) fraud - when a fraudster hacks access to a user's shopper profile or digital wallet using stolen credentials sourced from phishing attacks or data breaches. In Southeast Asia, ATO increased by 35% in 2022, compared to the previous year.
To mitigate such instances of criminal fraud, businesses should implement methods like fraud scoring and card network verification tools.
2. Friendly fraud
This type of fraud occurs when a customer completes a purchase with their e-wallet, debit or credit card, then disputes that purchase for a refund.
This isn't always driven by an intent to defraud; a chargeback request might also be triggered by buyer's remorse or user dissatisfaction. Truly larcenous "friendly fraud" occurs when buyers know in advance that they'll request a chargeback - they have every intention to receive an item, claim it never arrived, and ask for their money back.
Friendly fraud happens more often than you'd think: it's the root cause of 79% of chargeback cases, according to a Chargeflow report. Luckily, the chargeback representment process allows businesses to dispute chargebacks or defend the validity of the transaction.
You'll be required to submit evidence and documentation to support your case. It's worth the effort, given the possibility of recovering revenue lost in the dispute process!
3. Merchant error
We all make mistakes - but mistakes can cost retailers when their customers experience incorrect pricing, billing issues, or failure to deliver the correct goods. These problems may be attributed to outright fraud by the customer.
Despite the lack of fraudulent intention, this is still a major reputational risk — the customer is likely to complain publicly about your bad service or carelessness. You can mitigate chargebacks from merchant error by being proactive: identify your most common errors, then address them before they happen.
Three ways to secure your digitally-delivered goods from fraud
So how can you ensure the legitimacy of chargebacks over your digitally-delivered goods, and prevent fraud from taking place? Based on our experience, we have a few suggestions:
1. Choose a payment processing service with a stellar security record and robust fraud prevention capabilities
Credible payment processing services tend to invest heavily in technology that helps them retain their stellar reputations.
At a minimum, choose a payment processing service that implements multifactor authentication (MFA), a multi-step account login process that requires users to enter additional information, like a one-time code or a fingerprint scan. This prevents fraudsters from completing a transaction if they can't perform the additional verification step.
Machine-learning-enabled fraud prevention tools can analyze patterns and detect anomalies that indicate fraudulent activity. These systems use AI to continuously adapt to new threats, providing a dynamic defense against evolving fraud tactics.
Finally, 3D Secure (3DS) authentication provides an additional layer of authentication for credit card transactions, protecting against fraudulent actors. Antom's own 3D Secure tool can facilitate transactions where the users choose 3DS verification.
2. Invest in HTTPS
Savvy online businesses use Hypertext Transfer Protocol Secure (HTTPS) to protect customer data and ensure secure transactions. HTTPS is a secure step up from HTTP, the primary protocol used to send data between browsers and websites.
By encrypting data transmitted between a customer's browser and a merchant's server, HTTPS stops third parties from intercepting sensitive information, such as credit card details or e-wallet logins.
Browsers often flag HTTPS-less sites as insecure, driving away more cautious customers from doing business on your unsecured online shopfront. Consider this your wakeup call to adopt HTTPS: you'll need to obtain an SSL certificate, which can be done through a web hosting provider.
3. Implement a chargeback dispute management process to dispute fraudulent claims
Stay two steps ahead of both users and fraudsters, by instituting robust processes for chargebacks. This might include maintaining detailed transaction records, providing clear return and refund policies, and responding promptly to chargeback notifications.
Payment processing services like Antom actively help merchants monitor fraud and chargeback rates, and send alerts to clients that approach the thresholds set by individual card schemes. Your own payment services provider's risk control specialists can help you understand the limits set by each card scheme programme, and ask them for a feasible plan to avoid further loss.
The last word in securing digitally-delivered goods
There's no putting the genie back in the bottle — digital goods are now an indispensable part of consumers' lives. Antom can help secure your digital goods sales for buyers across the world.
Our ecosystem of 250 global payment methods gives you access to a combined user base of over 1.5 billion consumers. We also provide deep expertise in security and fraud prevention, with solutions like chargeback dispute management and risk monitoring designed to give you peace of mind.
Ready to take your business growth to the next level? Get in touch with our experts below.
