Overall and as a percentage of their operational budgets, digital goods retailers spend more on fraud prevention and chargebacks, according to the results of a new survey from antifraud technology provider Vesta and Javelin Strategy & Research. Online merchants that sell only digital goods, on average, spend $10 million annually fighting fraud and chargebacks, accounting for around 20 percent of their operating budgets, while their e-commerce and mobile counterparts that sell only physical goods spend $1.8 million per year, which accounts for 14 percent of their overall budgets. Hybrid sellers—those who sell physical and digital goods—split the difference, devoting $8.3 million on average each year to fraud and chargebacks, accounting for 13 percent of their budget.
The key difference between card-not-present merchants that sell digital goods and those that sell physical goods is personnel. Human capital devoted to fraud and chargeback management represents a little more than one-third of the spending in this area overall, but digital goods retailers employ nearly five times as many fraud and chargeback personnel as physical goods sellers and twice as many as e-commerce merchants who sell both digital and physical goods. And, with EMV migration in the U.S. expected to cause an increase in CNP fraud, it’s only getting worse.
“This study makes it clear: fraud costs are eating into many merchants’ budgets, reducing the amount of money that could be spent on activities that grow and improve the company,” said Al Pascual, director of fraud and security at Javelin. “Unfortunately, if merchants don’t take action now, those costs will continue to rise as merchants attempt to mitigate the growth of online and mobile fraud.”