How the e-commerce boom is also attracting a spike in chargeback fraud

The explosion in e-commerce growth has created room for a $12 billion problem of chargeback fraud.


Tom-Chris Emewulu

3 years ago | 5 min read

The recent boom in e-commerce has created room for a $12 billion problem of chargeback fraud and digital crimes.

The pandemic resulted in different forms of government-mandated restrictions worldwide, and e-commerce became the best available option for transactions and shopping.

A report by Digital Commerce 360 says that as many as 17 North American retailers filed for bankruptcy in the heat of the COVID-19 outbreak. These complications ushered in an unprecedented new wave of e-commerce growth like we’ve never seen before - sparking a 10-year growth in just 3 months.

According to ACI Worldwide Research, in May 2020, global e-commerce retail sales achieved 209% year-over-year revenue growth. In their descriptive analysis of e-commerce growth and trends in recent months, Adobe states that total online spending in May 2020 amounted to a staggering $82.5 billion, taking an uptick of 77% from May 2019.

And on their part, Kount’s research found that same-day or next-day shipping grew by 237% in mid-March and took an upward clip in late April by 305% compared to the same week of 2019.

The research further highlighted that transaction volumes in key product categories such as wellness and vitamin online transaction volumes grew by 91% year over year in mid-March. By the beginning of the second quarter of 2020, Sporting goods online card-not-present transaction volume saw a massive 599% year-on-year growth.

Source: Shopify
Source: Shopify

But as spending on online transactions continues to explode, so does chargeback fraud. Before we go into further details about how the explosion in e-commerce growth is fueling chargeback fraud, here are six e-commerce businesses you can put your money in right now.

  1. E-learning: According to Statista, the e-learning industry could reach over $370 billion in 2026, with a Compound annual growth rate (CAGR) of 14% in the next five years.
  2. Online Retail: Worldwide, sales in e-retail represent 14.1% of all retail sales, and Statista predicts that these figures will reach 22% by 2023. Now you can understand why Amazon generated a revenue of nearly $76 billion and $89 billion in the first and second quarters of this year, respectively.
  3. Online Grocery Sales: Several studies indicate that online grocery is a promising e-commerce niche, and the growth prospects will continue well-after the pandemic. One data shows that e-commerce growth in grocery sales reached 22% in the US in 2019.
  4. Food Vending: Everyone needs to eat, and an online food delivery marketplace could be a rewarding investment if you work out the logistics alright. Consider this: data from Research And Markets projects that global revenue from online food delivery will reach $200 Billion by 2025.
  5. Online Rental Marketplace: Rental service verticals such as transport, gym equipment, video game, furniture rental have seen astronomical growth in recent times. Research from Statista estimates that the US equipment rental market alone is growing at a 6.1% CAGR and could reach $59.4 billion in 2021.
  6. Medicare: With the global digital health market expected to surpass a valuation of $693.4bn by the end of 2026, this sector promises to be a lucrative investment option.

With those vital investment tips in the backburner, we look at some pressing challenges of chargeback fraud arising from the ongoing spike in e-commerce businesses worldwide.

A spike in e-commerce transactions comes with a sharp increase in chargeback fraud and other complexities.

In the wake of the e-commerce boom in March, industry leaders and digital fraud prevention experts began to sound a knowing alarm to e-commerce merchants on the need to take necessary precautions against chargeback fraud.

And true to those words of caution, research has shown that the boom in e-commerce growth generates a significant increase in chargeback fraud of about 23%. Although no industry is exempt from the rise in chargebacks, some e-commerce sectors experience chargeback frauds more than others.

For example, the digital content industry, which experienced a 75% uptick in transaction volume from March, received a 31% surge in chargebacks. Likewise, with a 126% year-on-year growth in online sales revenue as of April 2020, online gaming merchants struggled with an 18.3% increase in disputes in the same month.

ACI Global records that, on average, fraudulently attempted purchase value increased by $26 in April. This spike was driven by electronic purchases and increases in click-and-collect, which corresponds to a fraudulent attempted transactional value increase of 9.9 percent.

Overall, when you quantify the volume of chargeback fraud against the sales revenue of e-commerce vendors, it becomes apparent the chargeback fraud increases the more an online revenue merchant generates. That could equate to a 40% to 80% loss of sales revenue to e-commerce businesses in monetary terms.

But in all fairness, although chargeback fraud is chief among the culprits for the lost revenues recorded, there are other forms of digital scams that e-commerce businesses deal with today.

There’s also the issue of Accounts Takeover (ATO); when a fraudster gains access to an account that does not belong to them, changes information such as login credentials or personal information, and then makes unauthorized transactions in that account.

Javelin's research records that three times as many consumers were affected by ATO in 2016 than in 2017. ATO accounted for a $5.1 billion loss in 2017, and that number grew to $9 billion in 2019, a 56% increase from the base year.

So what’s going wrong? Is it that merchants are becoming so reckless as they experience more e-commerce growth?

The answer is simple: growth comes with underlying challenges. As Debbie Guerra, executive vice president of ACI Worldwide, explained in their publication, “Consumers are increasingly making use of click-and-collect options because of convenience and safety—but these changing patterns also attract fraudsters, resulting in a significant uptick in attempted fraud.

Fraudsters continue to use the disruption to the status quo to target unsuspecting consumers and unprepared businesses.”

You can rise to the growing chargeback fraud challenge with Chargeflow’s automation software.

When former First Lady Michelle Obama faced off Late, Late Show host James Corden at a Team USA vs. Team U.K. dodgeball match last year, she was determined to win the game.

In her characteristic motivational speech to her all-star team, she said to her girls, “When they go low, we also go low because that’s how dodgeball works.”

Likewise, you can’t approach the fight against chargeback fraud like a pillow princess. You have to get professional chargeback assistance if you wish to come out on top.

By the way, data from Vesta research shows that 55% of surveyed merchants acknowledge that in-house chargeback management drains resources from revenue-generating departments. And nearly 65% of respondents agree that outsourcing is the most cost-effective option.

Apart from helping you to accurately thwart all forms of chargeback fraud attempts with the help of machine learning and artificial intelligence, can also help you recover lost revenue in the case of eventualities.

Our top-of-the-line chargeback and dispute automation infrastructure provide you with exclusive insights into each customer interaction. And it offers you clear pathways on how to improve the identity protocols for every transaction to reduce issues of false positives, thereby enhancing customer experience. Join the fastest growing e-commerce businesses using Chargeflow to burst chargeback fraud maneuvers and recover more money.

This post first appeared here.


Created by

Tom-Chris Emewulu

I help entrepreneurs and rising professionals to be successful. I have consulted for brands such as the MasterCard Foundation, GIZ, British Council, and Seedstars, to name a few. And my work has been featured in Forbes, DW, Business Insider, SABC, and many other publications. Besides providing outside insights that help high-growth firms scale up faster, I'm also your guy if you need an SEO content writer to get you on page 1 of Google search ranking. You can find me on Social Media via @tomchrisemewulu.







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