Fraudsters who perpetrate schemes in the card-not-present (CNP) sphere may unfortunately find comfort in the SecureBuy-Magento 2013 Fraud Report. Based on an online survey conducted from February to May 2013, the report found that merchants globally investigate CNP chargeback requests only 54 percent of the time. The result is that millions of dollars in fraud that could be avoided is not, the researchers concluded.
The report noted that chargebacks are on the rise. "It's gotten so bad that some merchants simply refund the customer without challenge, in order to avoid, at any cost, excessive chargebacks that could put their ability to process at risk," the report said. Up to 30 percent of U.S.-based merchants and 57 percent of international merchants do not conduct any form of fraud pre-screening, according to the report.
Additionally, the researchers found that over 40 percent of merchants surveyed rely on the manual review of at least some of their transactions, which is an expensive process fraught with human error and the specter of "false positives" − legitimate transactions that are flagged as fraudulent, which results in lost sales and angry customers.
SecureBuy, an online fraud prevention firm and SignatureLink Inc. subsidiary, cited 2013 LexisNexis research that fraud perpetrated via the online channel costs merchants over three times the initial cost of fraudulent purchases. One out of every four transactions are flagged high risk and manually reviewed, according to LexisNexis. Out of that 25 percent of transactions, 75 percent are eventually accepted, while 7 percent find their way into the dreaded false positive or "inadvertent customer insult" categories. SecureBuy, along with eBay Inc.-owned payment gateway operator Magento, discovered that 32 percent of all merchants surveyed do not apply automated pre-fraud screening technology prior to authorization of CNP transactions, even as the manual process costs them millions.
Furthermore, 26 percent of survey respondents investigate only 5 percent or less of chargebacks, the report said. "The survey also found that international merchants contest chargebacks less frequently than merchants in North America," the researchers added.
SecureBuy and Magento said of additional concern is the lack of terms and conditions (T's & C's) compliance among merchants. As a best practice recommendation, the Federal Trade Commission said T's & C's should be displayed within the online check-out process. The report noted that Visa Inc.'s card acceptance guidelines state that T's & C's be embedded into the checkout process.
However, no survey respondents embed T's & C's within checkout. The pie chart comprises merchants who provide a check-box alternative (63 percent) and merchants who offer nothing (37 percent).
"History has proven that the only effective ways to fight chargebacks are to make sure that your terms and conditions are clearly displayed within the checkout and to obtain that all-important customer signature," said Greg Wooten, Chief Executive Officer at SecureBuy.
The traditional method of authorizing purchases by capturing customer signatures at the brick-and-mortar POS becomes more complicated in the online CNP realm, the researchers said. But solutions are available.
The researchers highlighted the Verified by Visa and MasterCard SecureCode programs, which employ 3D Secure protocols to authenticate consumers online. Wooten said 3D Secure allows cardholders to authenticate themselves via issuing banks, which foists all of the fraud risk onto issuers and lets "the merchant off the hook."
Wooten added that 3D Secure is not only a "tried and true method of proactively beating fraudsters before they can do any damage" but also a way for merchants to achieve "considerable interchange advantages."
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