Manual Ecommerce Fraud Detection is Killing Your Growth — Learn How Automation Can Help

If you run an online store, the last thing you need is another drain on already-slim profit margins. Unfortunately, ecommerce fraud is compounding the impact of higher shipping, customer-acquisition, and digital-advertising costs.

LexisNexis paints a bleak picture of the situation in an early 2024 study. More than half of the merchants surveyed by LexisNexis reported “a fraud increase of 6% or more in the 12 months prior to the study.” Digital channels accounted for “53% of overall fraud losses.”

These fraud losses cost North American merchants $3.00 for every $1.00 of fraud, according to the study. In an attempt to offset these financial losses, many merchants are now investing in fraud detection. And while these investments are necessary, manual ecommerce fraud detection may end up hurting your bottom line even more.

This article lays out the potential costs of manual fraud detection and why you should consider automating as much of it as possible. The payoff is reducing ecommerce fraud in the most cost-effective way.

Cost of manual ecommerce fraud detection

There are many types of ecommerce fraud, each with its own set of characteristics. One of the most common is when a fraudster steals a customer’s account login and credit card information, then uses them to purchase items on ecommerce websites. Most often this unauthorized access is the result of email “phishing” scams.

If you want to fight this type of online fraud manually, here are the potential costs:

#1: Personnel

Online merchants like you probably don’t have the time to teach yourself fraud-detection techniques or inspect every suspicious order…which means you’ll need to hire someone to do it for you.

Fraud detection is a skill, and high-demand skill sets have price tags. According to ZipRecruiter, the average US salary of a fraud detection specialist is $74,649, or $36 per hour.

#2: Chargebacks 

Chargebacks occur when an individual notices a fraudulent charge on their statement and disputes it with the credit card company. You, the merchant, must reimburse the company, plus pay a chargeback fee to the card processor. 

The chargeback fee varies based on your chargeback history and the perceived risk of doing business with you. MasterCard estimates merchants “incur $15 to $70 in operational costs for every card dispute.”

Because manual ecommerce fraud detection is often time-consuming, it heightens the risk of chargebacks. Here’s why:

Suppose a fraudster with a stolen credit card purchases a $150 pair of shoes, but the order ships before you recognize it as fraudulent. This time lag gives the credit card owner more time to notice and dispute the charge.

And if you want to dispute the chargeback, the credit card company will charge you again for the trouble.

#3: Wholesale value of item

Failing to catch a fraudulent order before it ships will also result in forfeiting the wholesale cost of the item. Say that $150 pair of shoes cost $75 to acquire from the manufacturer. You won’t get that $75 back.

#4: Shipping fees

High shipping costs are a major concern for merchants. And if too many fraudulent orders ship out without being caught, you’ve forfeited not just the shipping fees, but the packaging costs, as well. For example, the $150 shoes might cost $20 to ship and $10 to package.

#5: Customer acquisition

But suppose you’re able to flag a suspicious order before it ships. Flagging an order means delaying it until you’ve had time to determine whether or not it’s fraudulent.

When legitimate customers experience delays due to fraud reviews, some may cancel the order or worse, not order from you in the future. 

Take the “fashion and accessories” market segment. Shopify estimates merchants in this segment will spend $129 to acquire a single customer. If an existing customer churns because of a shipping delay, you’ve lost the money you spent acquiring them.

The total cost of manual ecommerce fraud prevention

Consider the shoe-selling merchant above. Assuming it takes an hour to deal manually with the fallout from a confirmed case of fraud, here’s what that merchant would spend

This merchant faces $320 in fraud-related costs. Of course, the total cost varies based on things like a merchant’s order volume, type of product, and the size of its fraud detection team. 

In any case, the potential costs are enough to kill your growth. Fortunately, automating fraud detection can help you catch far more fraudulent orders before they ship — with much less of an impact on your profit margins.

Benefits of automating ecommerce fraud detection

Automation can help reduce the operational costs of manual retail fraud detection while improving the customer experience. Sure, you’ll need to pay for an automation software subscription, but that cost dwarfs what you would pay manually to catch fraudsters. Here are some key benefits of automation:

Rapid, 24/7 processing of fraud reviews

The sooner you catch fraudulent online transactions, the more revenue you preserve. Fraud-detection software also operates around the clock, saving you the expense of hiring specialists for overnight shifts.

Reduces volume of manual order reviews

Even with automation software, you’ll still need to evaluate some orders manually. But the volume will be much lower, lightening the burden on your customer service and fraud teams.

Reduces repeat fraud attempts

A lot of automation software uses machine learning and AI to stop fraud before it starts. When this technology flags a transaction that turns out to be fraudulent, it “remembers” details from the transaction. These details can include email addresses with strangely worded usernames or the IP address of the fraudster.

If any of those details show up in a future transaction, the software sounds the alarm. Sure, the fraudster might try a different type of scam. But if they use the same IP address, the system can block the order. 

Better customer retention

Because your software learns continuously, it will gradually get better at more than flagging fraudulent orders. It will also get better at recognizing legitimate orders. Now fewer honest customers will suffer the friction of a fraud review, meaning you won’t have to spend more to acquire new ones.

How automated ecommerce fraud detection works

Any fraud-detection software you consider must include three core capabilities. And you may need a combination of software tools to get them.

#1: Identity verification

Automated identity verification can block online purchases by shoppers who have stolen credit cards or online account information. Software with this capability can compare a shopper’s name, address, phone number, date of birth, and even driver’s license with information contained in third-party and government databases. 

Some automated identity verification software can also apply additional safeguards for international orders, including looking up passports and other official government documents from various countries. 

Any mismatches can stop a fraudulent sale before it starts — saving your bottom line.

#2: Recognize fraudulent activity patterns

As fraud-detection software gets better at recognizing and blocking well-known scams, fraudsters will find new ways to game the system. When they do, your software must be able to detect anomalies that signal new types of fraud.

The ability to recognize emerging patterns means the software needs to deploy artificial intelligence and machine learning.

Some automated fraud detection software provides immediate access to intelligence gathered from all merchant transactions it has examined. It can then apply that intelligence to your online store’s transactions, all while learning behavior patterns that might be unique to your store.

The result of this learning is a fraud score that’s based on a variety of behaviors involved in a transaction, suggesting the likelihood of fraud. 

For example, the software might flag a phone number that’s been used in a fraudulent transaction with another merchant and notice that an IP address’s location doesn’t match a shopper’s zip code. In this case the fraud-risk score would be high, and you wouldn’t allow the transaction.

#3: Chargeback prevention

Chargeback prevention is possible because of advancements in identity verification and machine learning’s ability to recognize suspicious patterns of user behavior. The more fraudulent transactions you prevent, the less you’ll pay in chargeback fees and challenges.

Common chargeback prevention solutions may rely on a process similar to the previous example. Intelligence gathered from thousands of global ecommerce retailers can evaluate orders in real time and cancel those with a serious fraud risk. These evaluations can take place without adding friction to the customer checkout flow.

Save money on ecommerce fraud detection with automation and consolidation

Software automation and consolidation are two sides of the same coin. The former offsets the costs of manual fraud detection, while the latter lowers the development costs associated with making different software platforms work together.

You can choose to add multiple software platforms to help fight ecommerce fraud detection. But your development team would have to build APIs between these, your ecommerce platform, and helpdesk software. These integrations can be pricey. Any disruption between systems could result in an increase in fraud or a decline in the pre- and post-purchase customer experience.

Alternatively, you can integrate a single solution that reduces post-purchase fraud, streamlines customer interactions, automates claim intake and processes, and increases margins. Extend Post-Purchase Automation does all this while improving the post-purchase customer experience and saving you money. 

To learn more about Extend’s post-purchase solutions, click here for a custom demo.