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Report: Retailers of digital goods spend $10 million annually on fraud

BY Dan Berthiaume

Everyone knows fraud is costly, but it be more expensive than you think.

In addition to typical fraud costs, such as the loss of goods and chargeback fees, merchants that sell digital goods, such as MP3 files and streamed movies, each spend an average of $10.1 million every year on fraud-related costs.

A new study, “The Impact of Fraud and Chargeback Management on Operations,” conducted by Javelin on behalf of card-not-present transaction provider Vesta Corp., discovered that nearly three in four retailers dealing in both digital and physical goods say fraud and chargebacks have a major financial impact. These costs account for 13% to 20% of their operational budgets each year.

Sellers of physical goods report spending 14% of their budget on fraud-related costs, and hybrid merchants who sell both digital and physical goods spend 13%.

More than half (51%) of digital goods merchants expect fraud and chargeback costs to increase over the next 12 months.

Personnel costs represent more than 35% of fraud/chargeback spending for all merchants. However, digital goods merchants employ nearly five times the fraud personnel as physical goods merchants and nearly twice as many as hybrid merchants. Additionally, more than 60% of hybrid merchants and nearly half of digital and physical goods retailers believe that finding qualified personnel for fraud and chargeback management is difficult.

The study suggests that outsourcing fraud prevention services might help retailers, especially those dealing in digital goods, better manage associated costs.

“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.”

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