CNP Expo: Unique Fraud Challenges for Digital Goods Retailers

May 21, 2013

Fighting fraud presents unique challenges for merchants selling digital goods and dealing in digital currency. According to Ryan Welk of StubHub, “the customer’s expectation of instant gratification, on top of the sheer volume of transactions, mean decisions about fraud have to be made very quickly, and it’s hard to evaluate transactions one by one.” Manual reviews may be worthwhile, but David Parrott of Jagex pointed out that a manual-review strategy may not be realistic depending on the scale of transactions and the size of a company’s staff.

In general, digital merchants find that the opportunity costs outweigh the chargeback costs; in other words, turning away legitimate business through fraud prevention measures is riskier to the life of their business than allowing a few fraudulent transactions. But fraud prevention nevertheless remains a priority, since customer account takeovers and a high volume of fraud can close down a merchant site temporarily or even drive them out of business.

The panelists agreed that the solution to fraud in digital sales is the development of multilevel models to detect patterns of fraud and then deny certain types of transactions that the model identifies as potentially fraudulent. For instance, a company may develop a model that blocks transactions from a particular country, or over a certain amount for recently created accounts. These models then need to be reevaluated regularly—weekly or even daily—because fraudsters are constantly working to figure out which transactions are being blocked and finding ways to get around the rules.

BlueSnap CEO Ralph Dangelmaier also recommended that digital merchants encourage customers to help themselves by requiring periodic password resets and cautioning customers to use unique passwords for their various online accounts to help avoid account takeover by fraudsters.