The price of fame

As ecommerce booms worldwide and alternative payment methods drive more consumers to buy online, fraud is on the rise. Paul Skeldon takes a look at the downside of the digital commerce revolution – and what can be done to help

Wherever there is money to be paid there will be fraud and, while ecommerce is exploding – and driving the rapid growth and evolution of the payments market – it is also starting to drive its own explosion of fraud, chargebacks and other problems that threaten to hamper this growth.

According to research by Juniper Research, the cost of ecommerce fraud will rise from $44bn in 2024 to $107bn in 2029; a growth of 141%, fuelled by the use of deepfakes created using AI to defeat verification systems being a key threat. This, combined with rising levels of ‘friendly fraud’ – where fraud is committed by the customer themselves, such as refund fraud – is increasingly threatening merchant profitability.

AI is enabling fraudsters to remain ahead of security measures and commit sophisticated attacks on a greater scale.

By creating credible messages and a large number of synthetic identities, AI is facilitating higher quality attacks with an unprecedented frequency. These technologies are also highly scalable; empowering fraudsters to heavily automate their attacks and overwhelm rules-based prevention systems.

Report author Thomas Wilson says: “Ecommerce merchants must seek to integrate fraud prevention systems that offer AI

capabilities to quickly identify emerging tactics. This will prove especially important in developed markets, where larger merchants are at higher risk of being targeted for fraud, such as testing stolen credit cards.”

IMPACTING DEVELOPING MARKETS

As seen on pages 16 to 19, the MENA region has experienced substantial growth in digital commerce and alternative payment methods. Digital payment volumes have grown by an impressive 658% since 2020, according to Dubai-based Checkout.com research. The number of consumers shopping online at least once a day has increased by 80% across the same timeframe, while 91% of the region’s customers have reported shopping online in the past two years.

This rapid adoption of digital payments reflects a shift towards convenience and efficiency in everyday transactions.

However, it is having a massive impact on ecommerce fraud, which in turn is having a significant impact on consumer trust and loyalty. A third (33%) of MENA consumers report being victims of payment fraud, says Checkout.com, while 39% of MENA users now prioritise secure checkout as their top concern. Up to 30% of shoppers would switch to a competitor’s website after experiencing a single falsely declined payment. These statistics highlight the growing importance of payment security in winning and retaining customer loyalty. For example, the preference for cash on delivery has halved from 41% to

20% over the past 48 months, reflecting broader acceptance and trust in digital payments, cards, and digital wallets. This shift is particularly pronounced in countries like Saudi Arabia, UAE and Kuwait.

ET TU EUROPE?

The problem is not confined to MENA. Ecommerce fraud is causing substantial financial losses in Europe. Payment fraud in the European Economic Area (EEA) reached €4.3 billion in 2022, with an additional €2.0 billion reported in early 2023, according to a study by the European Central Bank (ECB). It found that, online payment fraud losses are predicted to exceed $48 billion globally in 2023, with Europe accounting for 26% of this figure. The cumulative losses to online payment fraud globally between now and 2027 are expected to exceed $343

These significant losses are putting pressure on businesses to improve their fraud prevention measures as well as effecting payment providers and the payment tools they offer.

According to the ECB study, card payments had the highest fraud rate at 0.031% of the total transaction value in the first half of 2023 in Europe, while e-money transactions followed closely with a fraud rate of 0.022%. Credit transfers, despite having high absolute fraud values, had a low fraud rate of 0.001%.

Germany and France are the hardest hit by e-commerce fraud in Europe, while two out of every three online retailers in Germany identified an increase in e-commerce fraud. Over 85% of online merchants in Switzerland reported having been struck by fraudsters last year. These variations may lead to different rates of adoption for alternative payment methods across European countries. The report also shows a significant difference between where transactions occur and where fraud takes place, with most fraud happening crossborder. This highlights the complexity of securing international transactions against fraud and may impact the growth of alternative payment methods for cross-border ecommerce.

PAYMENTS HOLD THE SECURITY KEY

To combat fraud and improve security, businesses are adopting new technologies, especially around payments. Contactless and mobile payment methods like Apple Pay and Google Pay have seen significant growth, with processing volumes surging by 14x and 4x respectively in the past 48 months. Meanwhile, merchants are leveraging

AI and machine learning for fraud detection and prevention and tokenisation – where details of bank account and sort code are replaced by a secure token instead to authenticate digital transactions – are increasingly being used, with businesses focusing on strengthening payment security, partnering with regulated payment service providers and leveraging advanced technologies to minimise fraud and optimise performance.

The prevalence of fraud is affecting consumer behaviour: 93% of Europeans are worried about the rising cost of living, which may make them more cautious about adopting new payment methods.

However, the German B2C ecommerce market was forecast to grow, and e-commerce sales hit over €129 billion in France in 2021, indicating continued consumer interest in online shopping despite fraud concerns.

CHARGEBACKS AND FRIENDLY FRAUD

Almost three quarters (72%) of merchants have experienced an increase in chargebacks over the past three years, with many businesses raising prices to offset the growing costs.

These recently released findings from global chargeback tech company Chargebacks911 come as the payments industry grapples with the fact that illegitimate disputes by cardholders through card-not-present (CNP) transactions are outpacing the growth of eCommerce sales.

The findings from the 2024 Chargeback Field Report, which surveyed 300 retailers, from small businesses to enterprise merchants., emphasise that the rise in chargebacks—driven largely by first-party misuse (also known as “friendly fraud”)—is having a direct impact on pricing strategies across industries.

According to the report, presented in partnership with Edgar, Dunn & Company, 57% of merchants who observed changes in chargebacks noted an increase in frequency, with an average spike of 18%.

As a result, nearly one-third of respondents admitted that the financial burden of managing these disputes has forced them to increase prices on goods and services.

“The rise in chargebacks is becoming a vicious cycle,” says Monica Eaton, CEO of Chargebacks911. “Merchants are raising prices to cover the cost of disputes, but in turn,

this pricing pressure gives more incentive to those inclined to commit first-party misuse. The data clearly shows that friendly fraud is the real issue, far surpassing criminal fraud in many sectors.”

THE BIG SHIFT

The report highlights a shift away from concerns over criminal fraud, with friendly fraud becoming the leading cause of chargebacks for many merchants. Nearly half of the respondents estimated that friendly fraud was responsible for at least 50% of their chargebacks, and 45% of those surveyed believed that customer misunderstandings—like not recognising transactions on billing statements—were a key driver.

Moreover, many merchants are struggling to effectively combat these illegitimate claims. While 75% of participants reported challenging some chargebacks, nearly half admitted that they don’t track second-cycle disputes, which suggests their recovery rates may be lower than expected. In response to the rise in chargebacks, many merchants are turning to new technologies and strategies to mitigate losses. Two-thirds of survey respondents reported either using or planning to implement AI-powered fraud prevention tools. Despite these efforts, the report warns that businesses must do more to address the underlying issue of first-party misuse and better educate consumers on the proper use of chargebacks.

“Merchants need to be proactive, not just reactive,” added Eaton. “By employing better chargeback prevention tools and leveraging professional dispute management services, businesses can reduce their exposure to friendly fraud and regain control over their bottom line.”