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 min read

The Problem with Fraud with Digital Products

Digital product sellers lose 9.7% of profits to fraudulence. Single digit margins and fraud are a recipe for failure, unless you have the right tools to provide the best user experience.

How Scams Impact the Digital Products Market


What are Digital Products


The term "digital products" describes virtual items that are stored, acquired and utilized online. These range from subscriptions, memberships, game codes, accounts, books, gift cards to coupons - basically anything where the terms, payment and the distribution  on-line and instantaneous.


The rising tide of digital products and the falling costs of opening up your own ecommerce store has led to a large increase in available targets for casual fraudster and dedicated hacker alike. Defrauders are trying to make use of weaknesses in a vendors safety systems. According to Javelin Research, fraud now takes 8% of the typical shopping vendor's income stream, as well as 9.7% of profits amongst merchants who market only electronic goods, such as books, e-tickets, and also various other immediately  downloaded digital products. In competitive markets with razor thin margins, this often means the difference between making a living or going out of business.


What are the advantages of digital goods?


Digital goods supplied immediately to the buyer without the wait on distribution is a huge advantage. To do well in this space it's essential that the user experience (UX) is as smooth as possible with speed of delivery being the key factor in the experience. The account creation process also has to be an optimal experience. Follow-on business is critical as the lifetime value (LTV) far exceeds a value of making a single sale. It can be difficult for a digital product seller to strike the perfect balance between user experience, speed and security. Those that do are finding success with the new paradigm of digital product consumption.

Digital products provide near liquidity when compared to businesses centered on hard goods. There are no shipping or warehouse expenses, so the market entry rate is low.

According to the research, the digital product stores are spending up to 20% of their operating budget on scams and chargeback fees.

Why do criminals like electronic goods?


Well, as Willie Sutton eponymous law states, "That's where the money is."

Most digital products are currently bought with card not present (CNP). So the ability to take accounts as well as re-sell the details online is an expanding enterprise. The success of Pirate Bay and torrents has eliminated most social stigma related to stealing digital property. There's a degree of depersonalization in online commerce of digital goods, where the fraudster fails to consider the impact. Or, perhaps they don't consider it 'real' theft due the amount. Prosecution for anybody participating in online digital criminal enterprise is very rare. You could apply any logical fallacy to digital goods fraud and it would all come to to the same conclusion.

Digital items sellers need to look after their own businesses.

The study reported that when contrasted to 2016 information, chargeback losses, which take place when vendors end up bearing the cost for legitimate customers when it comes to friendly fraud, "has increased by 60% among electronic items merchants". And false positives, which take place when sellers incorrectly decline valid purchases, "boosted by 25% among electronic goods vendors and 27% among physical items merchants. Merchants of electronic products are spending as much as 20% of their operational budget plans on fraudulence and also chargeback management." (2)


Fraud Considerations for Digital Product Sellers


There are a variety of particular fraud threats that need to be minimized or considered in any type of fraud support for an digital business. With immediate satisfaction as well as absence of constraints, a bot making a single swipe can swiftly escalate to a big chargeback or account concession trouble.


Friction sensitivity

No business wants to lose a good customers over fraud risk. But electronic products clients are particularly unpredictable and an incorrect rejection generally implies a permanently lost consumer. This influences the amount of friction a merchant can include in a process.


Limited data

Compared to a business selling physical products or a service there is much less traditional information for a fraud screening system. This needs much better use of the information that exists.


Mobile acquisitions

For some services, the whole sales volume is in-app. At the very least any kind of fraudulence discovery system needs to be outstanding at taking advantage of the data that a mobile experience provides.

Labor costs

Fraud detection is accomplished by heuristic guidelines, but more frequently manual processing of transactions and checking government issued identification. This puts an enormous burden on the seller to assure the high quality of the buyer experience while balancing the costs of losing product and chargebacks. What most don't consider is the operational cost of their own labor and the opportunity cost. Focusing efforts on one area of your business comes at the expense of another. Time spent checking IDs equals time not spent growing your business.

Error rate

Any time manual processes occur, you can be sure there is an error rate associated with it. False positives lead to lost business, false negatives lead to lost product and chargebacks. There is significant business in the margins, especially when considering the lifetime value of a potential customer and their likely unwillingness to return if provided a poor experience.

Scale

For digital products businesses trying to scale up, manual processing is not even a possibility. The secret to compete in this market is immediate fulfilment. A client needs to their order fulfilled, risk-free, with protection for both sides of the transaction. For that reason the fraud check needs to occur in the moment before fulfillment. The only means to do this effectively is with an automatic system that utilizes every modern technique available to detect and avoid the sales that are likely fraudulent.

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