How Fighting Digital Goods Payment Fraud Is Like Fighting COVID-19
The novel Coronavirus virus poses more risk to society than the common flu. This is due to higher infection rates, the severe symptoms that may even result in death, and the strain it puts on our medical infrastructure. In a very similar manner, merchants suffer from higher risk due to payment fraud in digital goods than they do in physical goods. The attack rate is higher and it puts a strain on already slim margins.
Fighting payment fraud in digital goods with conventional fraud prevention tools is like fighting COVID19 with social distancing - it’s effective, but also comes with an almost unbearable economic impact.
What if there were other ways that can do it faster, more efficiently and with less of an impact on people’s well-being in other areas?
What Makes Digital Goods Attractive to Fraudsters?
Digital goods with high resale value suffer from increased fraud pressure, as they are delivered immediately after the purchase completion - leaving no time for a team of analysts to perform a manual review. What’s more, there are often legitimate as well as illegitimate secondary markets for these goods. Just think how easy it is to sell a giftcard at 10% - 20% off, or concert tickets because you can’t make it in the end.
The growth of payment fraud in digital goods is so extreme, that it has been found to be growing at more than double that of physical goods.
LexisNexis 2019 True Cost of Fraud Study - Retail Edition
Read more about what makes digital goods attractive to fraudsters.
“Patient Symptoms” Are More Severe in Digital Goods
Payment fraud is a professional, scalable business - fraudsters work at it and delvelop fraud “machines”. It is not uncommon for fraudsters to build dedicated bot-nets to use stolen credentials purchased on the darknet. The more attractive a good is (high value, fast and easy resell) the more fraudsters will invest and merchants will be under more severe attacks.
Take the gift card industry for example. According to a Radial CNP report, the attack rate for open-loop gift cards is nearly 21 percent, entertainment companies’ digital gift cards encounter attack rates of 24 percent, while e-gift cards offered by jewelry merchants suffer from a staggering 28 percent attack rate.
Fighting the fraud is clearly a huge effort.
Current Fraud Protection Methods Come With a Cost - Just Like Social Distancing in COVID-19
Traditional Fraud protection tools analyze transactions in an attempt to correctly decide which purchases to approve, and which to decline. For online retailers selling physical goods, approximately 15% of transactions are difficult to clearly define as either fraudulent or legitimate, and many are sent for manual review. This manual review process takes time and costs money, but it allows for retailers to reach optimal acceptance rates. Since there is an inherent time gap between the completion of the transaction and product delivery, it does not impact customer experience as much.
Digital goods are different. Their immediate delivery nature does not allow for a proper manual review process, as the only way to analyze individual transactions would include introducing a “delayed delivery”, resulting in unnatural friction in a product that is meant to immediately be delivered to the buyer, online.
In fact, friction is the name of the game when trying to manage fraud pressure in digital goods.
Online Merchants Face an Impossible Choice
The most common method today to deter fraudsters is elevating friction levels in the purchasing process. One form of friction mentioned above is delayed delivery. PSD2 and 3Dsecure are the more standardized forms of friction introduced by the financial industry to fight fraud.
The PSD2 strong customer authentication provision requires the use of multifactor authentication. 3DSecure sends the customer to a totally different site for additional authentication by the card issuer. Both these methods introduce additional steps to the buying introducing points where legitimate customers drop off.
The ultimate goal of fraud prevention solutions is not just to identify and block fraud attempts, but to nip fraud attempts in the bud, so that they do not weigh down your resources.
In order to discourage professional attacks, the “cost” to the fraudster of scaling the attack needs to be high. The friction needs to be high enough so it’s not worth the effort, and the fraudster will go elsewhere. Note that without a suitable fraud prevention solution, the more attractive the good - the more friction needs to be introduced to turn fraudsters away.
So What’s the Catch?
Friction for fraudsters also means friction for legitimate customers. And friction for a legitimate customer means a loss of a customer, at best. At worst, it also means a bad review.
But that is only part of the picture. Online merchants and retailers invest heavily in customer acquisition and in a great user experience designed to drive website conversions. All that investment of time and resources is based not only on a single purchase but on customer lifetime value. Digital businesses are constantly measuring and trying to improve their CAC (Customer Acquisition Cost) and lifetime value.
The choice between possibly turning away good customers, and introducing more friction or accepting a high chargeback rate is an impossible one.
What We Really Need Is a Vaccine, Not Social Distancing
Just like world leaders are faced with a tough decision, so are retailers. But what if there was a different way? If there was a vaccine or a cure for Coronavirus, the impact on society would be huge. Such a cure requires an understanding of the virus and its effects on the human body.
In the same way, a “vaccine” to digital goods payment fraud requires a high understanding of its unique behavior.
Payment fraud in digital goods is a scalable, professional game. Fraud prevention tools need to be able to identify fraudulent transactions in real-time without relying on excessive customer friction or delayed delivery. Such tools must rely on advanced artificial intelligence and deep learning models that specialize in digital goods fraud, and they must be equipped to stop it in real-time.
Luckily for online sellers of digital goods, such tools do exist. Hopefully, there will soon be a cure for COVID-19 as well