Small Online Stores Will Spend $2.62 for Every $1 of a Fraudulent Transaction

One fraudulent online order can cost a small retailer nearly three times as much as the cost of the transaction. That’s what Stripe found in its December 2017 Online Fraud Trends and Behavior report (PDF).

Online Fraud Trends Report

The online payment processor recently released the report and gave Small Business Trends a unique perspective via exclusive email comments.

“One of our goals in publishing the report is to help small businesses better understand how and when fraudulent behavior shows up, so they can create specific strategies that directly address their needs,” says Michael Manapat, engineering manager for payments intelligence and experience at Stripe, in an email with Small Business Trends.

Stripe’s report found that a small online retail business will spend $2.62 battling back against online fraud for every $1 of a fraudulent order. That goes up to $3.34 for a mobile retail store. Therefore, it would make sense that it’s best to put up defense before falling victim to fraudulent transactions.

But how much defense is enough?

It’s true that cyber crimes are on the rise and it’s also true that small businesses are increasingly targeted by fraudsters. And as the security of transactions at brick-and-mortar stores increases, the likelihood that online transactions will be targeted more often goes up, too.

However, it’s also true that small businesses can over-invest in online fraud protection. This report from Stripe tries to help small online retailers identify where they need to protect themselves.

“Given their limited resources, most small businesses need to make trade-offs between policing fraud and maximizing profitability. Smaller companies can use the report to identify consistent patterns of fraudulent behavior,” Manapat says.

A small online retail store may have to ultimately decide whether to install some anti-fraud software on their store. But not every small business will have the money or resources to deploy such a defense. In other cases, Manapat says, online stores need to identify trends among fraudsters to spot suspicious activity while it’s happening.

For starters, smaller stores need to be capturing more information about their customers up front. This greatly reduces the chances of a fraudulent transaction.

“While every business is different, understanding how fraud shows up will not only help smaller retailers more effectively combat fraud, but also help them understand why setting better rules is so important,” Manapat adds.

Other key signs of transaction fraud online are purchases coming in at abnormally high rates. Fraud actors will sometimes purchase at 10 times the normal pace usually seen on a site. They also like to hit during evening hours, according to Stripe. And you can expect this activity during lower traffic times on a site.

“For example, fraud rates do not rise notably on heavy shopping days like Black Friday, but rather on days like Christmas when many people aren’t shopping,” the report explains.

Another key finding from the report shows that most fraudulent transactions aren’t for big-ticket items. Instead, it’s smaller transactions that tend to be fraudulent.

“In the United States, Stripe data shows that fraudulent transaction amounts are only slightly larger than regular transaction amounts,” the report states.

Stripe suggests that small online retailers work with a payment processor that deploys machine learning technology to help spot bogus transactions. But the company also notes that relying just on AI to spot fraud is not enough. Manual vigilance is also necessary.

“Machine learning models address this challenge by incorporating many context-specific nuances in order to reject only the most suspicious transactions, rather than putting in place blanket rules that can easily wind up blocking good transactions. Merchants should work with payment processors with machine learning and other technologies to optimize these complex trade-offs between stopping fraud and maximizing profitability,” the report adds.

Photo via Shutterstock

This article, "Small Online Stores Will Spend $2.62 for Every $1 of a Fraudulent Transaction" was first published on Small Business Trends