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Why young ecommerce companies are the perfect target for fraudsters

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If you were a thief and you had to choose between robbing a new store with limited inventory but very little security, or from an established multinational brand with plenty of valuable goods and heavy defenses, which would you choose? Most criminals choose the former as they know they’ll likely steal less but not get caught, which is more important to them than a large payday, because successfully stealing smaller amounts allows them to steal again and again. Fraudsters apply the same logic to online stores and target new ecommerce sites hoping to complete one or more purchases easily without being caught. New stores provide a good return on their investment of stolen credit cards and they can often spend less time with younger merchants than they need to buy from more established sites. But what exactly makes young ecommerce companies so vulnerable to fraud?

1. Young ecommerce companies often launch without fraud protection

Most experienced ecommerce business owners remember when they got their first chargeback – that unexpected reversal of funds they had already earmarked for other purposes. For most site owners the first chargeback is a surprise because they hadn’t considered fraud when they launched their online store. They were happy just to have customers buy from them. They hadn’t considered if these “customers” were legit or if they were fraudsters simply looking to acquire their goods to resell quickly on the gray market.

With so many sites launching without fraud prevention, fraudsters have a valid reason for preying on the young – it’s easy and lucrative. For most merchants their first chargeback quickly triggers a tremendous amount of research on fraud prevention, or in our case, complete Guaranteed Fraud Protection.

2. Young ecommerce companies lack in-house fraud prevention expertise

When you think about the skills needed to start an online business, fraud prevention/analysis doesn’t easily come to mind. Thus, when a young company decides they need to get a fraud prevention solution, they run into their second issue – they don’t have anyone who knows much about fraud prevention. This may not seem like a major problem since their primary focus is to reduce fraud while focusing on growing their core business, but it becomes an issue when they begin implementing deny lists and stringent policies to decline orders they shouldn’t. Ironically, fraud prevention tools often recommend these policies as they’re measured by how much fraud they help a merchant detect/prevent, not how much revenue they incorrectly decline. Young merchants often lose critical revenue to false declines, which not only hurts their cash flow but frustrates legitimate customers who won’t return to their site.

3. Young ecommerce companies don’t necessarily know how their “good” customers behave

For a young company, a “customer” buying premium add-ons and requesting overnight delivery seems almost too good to be true – because it probably isn’t. Since fraudsters aren’t going to pay the merchant anything they often emulate the profile of a premium customer to ensure the merchant ships to them quickly. Where a young merchant thinks they’re getting additional revenue with plenty of extra margin, they’re actually about to pay for all those extras and expedited shipping themselves when they chargeback is filed against them.

Understanding your customer’s profile, preferences and priorities are key aspects of running a successful business. Hence, if you know your buyers are sensitive to shipping costs, be wary of buyers who don’t care how much shipping costs as long as they can get your product as soon as possible. Likewise, think carefully about how much loss you would incur if an overly eager customer never pays, after requesting every possible premium add-on.

4. Young ecommerce companies lack the resources to reduce or contest chargebacks

Merchants can take many steps to ensure they’re complying with their payment processor’s requirements. Yet young company owners are often multi-tasking and thus don’t have the time or resources to contest chargebacks they’ve received unfairly. They also don’t have the time to put in place best practices to effectively limit fraud, especially friendly fraud. This can include site hygiene considerations like a clearly stated and visible return policy or the need for a signature upon delivery of higher value items.

Signifyd was founded on the belief that ecommerce businesses should be able to grow without fear of fraud. We know ecommerce merchants didn’t launch an online store to build fraud prevention expertise, much like they didn’t start a business to become tax experts. As the world’s largest provider of Guaranteed Fraud Protection, Signifyd solves the challenges that growing ecommerce businesses persistently face with fraud losses from chargebacks, customer dissatisfaction from mistaken declines and operational costs due to tedious, manual transaction investigation.

Signifyd protects online retailers against chargebacks with a 100% financial guarantee against fraud for every approved order. Signifyd’s full-service machine-learning engine automates fraud prevention allowing businesses to increase sales and open new markets while reducing risk. Signifyd is in use by multiple companies on the Fortune 1000 and Internet Retailer Top 500 list. Signifyd was recognized as one of the 50 most innovative Fintech companies of 2016 by Forbes and as the Fraud Innovation Firm of the Year by Finance Monthly.

Sourabh Kothari

Sourabh Kothari

Sourabh is the former Director of Merchant Advocacy at Signifyd, where he brought over 18 years of experience defining, designing and delivering content through stories, events and video.