Up to 13% of Global Online Transactions Could be Fraudulent

Oct 27, 2021

According to Digital Commerce 360, consumers spent $791.70 billion online with U.S. merchants back in 2020. This was a staggering increase of 32.4% based on the U.S. Department of Commerce numbers. This is the highest growth that U.S. e-Commerce has seen in the last twenty years. It was more than double the 15.1% hike in 2019.

The COVID-19 related surge in online shopping resulted in an additional $105.47 billion in revenue in 2020. Although these numbers are great news for e-Commerce merchants, many are unprepared for what is an inevitable threat, card-not-present fraud, or (CNP).

The Findings

Vesta, a Portland-based end-to-end transaction guarantee platform for online purchases, launched its first Global Card-Not-Present (CNP) Fraud Report that analyzed millions of digital transactions that took place from the first quarter of 2020 through the first quarter of 2021. 

The goal was to monitor how CNP fraud has evolved during that period of time. The results were found that the overall percentage of global transactions identified as possibly fraudulent ranged from 10% to 13%. The average value for each fraudulent transaction ranged from $126 to $155. 

CNP Transactions Defined

The way a CNP transaction takes place is when a sale is carried out without the customer physically giving their card to the merchant. Unfortunately, if the transaction turns out to be fraudulent, the responsibility falls onto the merchant. 

When a merchant approves a CNP transaction that happens to be fraudulent, this leads to a chargeback. Chargebacks are associated with fees. These fees can be as high as $25 per occurrence. 

In just the first quarter of 2020, Vesta discovered that 13% of total transactions were likely to be fraudulent. Those transactions were stopped to protect its customers. 

One thing to note is that the 13% included both high and low-risk merchants. For low-risk merchants, Vesta approved 99% of all those transactions. However, for high-risk merchants, the rate of approval varied and it largely depended on the fraudulent activity. 

When high-risk merchants do not have a solid solution and approve many fraudulent transactions, this can have a disastrous impact, not only on the company’s revenue but on the company’s brand reputation. 

Implications Of Fraudulent CNP Transactions

Ron Hynes, CEO of Vesta said:

“If you’re an eCommerce business doing 5 million transactions per year and 13% of those are fraudulent, you’re looking at 650,000 bad transactions, and if each one of those comes with a $25 chargeback fee, you’re now looking at more than $16 million dollars in fees. 

On the other hand, if you decline too many legitimate transactions in an effort to fight fraud, you end up with significant losses.” 

Vesta’s report also covered that there are two types of CNP fraud that merchants must be aware of: Direct linkage and Indirect linkage.

  • Direct linkage: this means there is a common connection within the transactions that merchants can look for as signs for potential fraud. 
  • Indirect linkage: here transactions are linked through a more complicated “web of elements”. This usually points to a more sophisticated type of fraudsters that are trying to cover their tracks, making it more difficult for merchants to identify. 

A Growing, Complex Problem To Navigate

Hynes points out that there is an increase in fraudulent transactions with indirect linkage. The average value of those transactions are also considerably higher than those with a direct linkage. What merchants now have on their hands is a complex issue that is not only difficult to deal with, but also expensive.

The solution to both identify and prevent CNP fraud, he explains, is to implement machine learning that has been trained against “millions of global transactions.” This way, it is able to draw connections that humans cannot see.

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.