The digital goods market is one of the sectors with the highest growth rate in the e-commerce arena. The digital products sold in the United States alone totaled US$2.3 billion in 2011, meaning that 1 out of 4 consumers bought digital goods online in 2011. However, despite the soaring sales and the promising growth expectations, digital goods fraud threatens the industry and the merchants within it. In fact, digital products merchants often experience a higher amount of fraudulent orders than merchants dealing with non-digital goods.

Understanding digital goods fraud risks

Digital goods are very attractive to fraudsters largely due to the following factors:

  • Delivery method
    The electronic delivery of digital goods (email or URL) allows the exchange of ownership to take place within seconds and is harder to trace
  • Resale value
    Most digital goods retain their value once purchased; fraudsters can easily resell their purchase for financial gain
  • Transferability
    Digital goods can be used without requiring personal data and therefore easily transferable between users

The consequences of fraud

Unfortunately for digital goods merchants, they usually face higher chargeback losses than physical goods merchants. An increasing percentage of losses due to fraud bring the following consequences for digital merchants:

  • Lack of focus on core competencies
    The high percentage of loss from fraud cause merchants to invest more resources in reducing fraud, and accidentally overlook their business’s core competencies. However, fraud attacks still occur as fraud schemes evolve faster than merchants usually react.
  • Losing payment methods
    Fraudsters target their attacks on those payment methods which are more vulnerable. Merchants tend to abandon that payment method, but in the process also give up on the customers who use it for their online purchases.
  • Unlimited loss
    The real risk of a high chargeback rate includes all related expenses that merchants incur when a chargeback happens, on top of the chargeback cost. This includes customer loss, sales loss, extra spending in updating protection systems, and the biggest risk of all: business closure.

In a vain attempt to minimize their losses from fraud, merchants tend to react by setting tougher and more restrictive parameters and risk thresholds in their verification systems. More often than not, these measures are designed to be risk-averse in rejecting suspicious orders. Consequently, all suspicious orders, even of genuine customers, are rejected. In the long run, this risk averse approach can severely hamper profitability.

How risk management reduces the effects of fraud in a high chargeback risk environment

Risk management cannot change the nature of digital goods. However, it can filter out fraudulent orders easily, drastically reducing the fraud loss for digital merchants. A system that adapts to the merchants’ needs and is up-to-date can stop coordinated attacks targeted to any payment method; react to ever-changing fraud schemes; and increase acceptance rates of genuine customers by accurately identifying fraud. This way, digital merchants are free from the burden of having to detect fraud by themselves using outdated, insufficient tools; instead they can focus their attention on essential business areas that eventually lead to revenue growth.