Blog June 4th 2020

The Dark Side of Ecommerce: Fraud and Lost Customers

In recent weeks, retailers have seen a phenomenal shift from in-store to online spending, with the COVID-19 pandemic accelerating the growth of ecommerce at an unprecedented rate.

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Callum Godwin

Chief Economist

For many merchants, having the ability to trade online has been the difference between sinking and swimming – particularly for those who have seen widespread store closures – and we have seen numerous examples of retailers’ revenues hitting zero without the benefits of an ecommerce channel.

However, in addition to rising costs and online routing barriers, the shift to ecommerce comes with – potentially leading to additional costs and even reputational damage for retailers. Although it may be tempting to mitigate this by tightening up on fraud prevention, this can often lead to good customers having their transactions declined: resulting in lost sales, and even life-long lost customers.

How Prevalent is Fraud Online?

Online channels are more complex than in-store and carry a higher risk: average U.S. Card Not Present (CNP) – online transactions – fraud rates are 18 basis points (bps), compared with just 8bps for Card Present (CP) – in-store – transactions. Even CP fraud rates are higher than the global average of 7bps, largely because the U.S. still doesn’t have widespread PIN deployment.

Since the EMV liability shift in 2015, an initiative from the global card networks to promote the use of chip cards and prevent identity fraud in the face-to-face environment through, we have seen U.S. CNP fraud rates rise, as sophisticated fraudsters turned their attention to online channels – and these increased volumes are likely to whet their appetite. For a $1 billion retailer, moving from fully in-store to fully online would see an average of $1 million of additional fraud – and the retailer would be liable to foot most of the bill.

Why is Fraud Such a Big Problem?

This can be mitigated by robust fraud prevention tools, but these can be expensive and time-consuming to implement. Another way to deal with increased fraud is through stronger authentication, with 3D Secure (3DS) being Visa and Mastercard’s chosen solution in this area. However, 3DS has been unpopular with U.S. merchants so far, with the barriers it puts up driving away good customers and reducing conversion rates.

More recent upgrades of 3DS, such as 3DS v2, are looking to address these concerns by performing risk-based authentication filters, but this is as-yet unproven. Further, merchants with operations in Europe will have to watch out for impending Strong Customer Authentication (SCA) regulations, which mandate at least two authentication methods are used for every transaction.

How Are Approval Rates Affected?

There are also issues around low online approval rates, as we covered in our webinar,‘ The Ecommerce Catalyst: Adapting Your Payments for an Online World’. CMSPI data suggests average online approval rates are just 85%, as opposed to 97% for face-to-face transactions.

For the $1 billion revenue retailer from our previous example, this would see revenue drop by $120 million. Worse still, on average, one fifth of those sales will be good customers wrongly turned away – who, in over 50% of cases, will go to a competitor. Retailers can get around this by analyzing their declined transactions and building stronger relationships with issuers and processors, but many simply lack the internal resources to do this successfully.


Online spending is fundamentally riskier than in-store spending: fraud and chargeback rates are higher; approval rates are lower; and raising customer authentication levels risks losing good customers. Getting this right in such a short period of time, with so much at stake, is incredibly tricky, but the merchants who will be able to do that will achieve a significant competitive advantage.

Merchants should seek to thoroughly audit and benchmark their online arrangements, ensuring approval rates are balanced optimally against fraud: keeping revenues maximized; fraud minimized; and customers satisfied now and into the future.

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