Recurring Payments May Make You Susceptible to Ecommerce Fraud

Recurring Payments May Make You Susceptible to Ecommerce Fraud

So, you think you’re exempt from needing ecommerce fraud protection because your business is based on recurring payments?

If only that were true.

It’s easy to be lulled into the belief that having subscription customers protects you from fraudsters, but you could actually have fraudsters in your midst right now. To truly protect your online business from ecommerce fraud, make sure you know how fraudsters target businesses like yours through natural weak spots.

Why You Should Be Concerned About Subscription Fraud

Starting an ecommerce business based on subscription services or payments is definitely attractive and offers a world of benefits: Consistency, easy transition to revenue, and predictability are just a few.

But the very nature of those benefits is also what makes your business an ideal target for fraudsters: Because subscriptions tend to be a smaller-ticket transaction, merchants may not be as vigilant with fraud protection.

Because subscriptions tend to be a smaller-ticket transaction, merchants may not be as vigilant with fraud protection.

As it turns out, however, there are several ways in which fraudsters can take advantage of subscription services.

Subscription-Based Businesses Can Have a High Level of Friendly Fraud

A common issue we tackle for ecommerce merchants with recurring payments is friendly fraud.

This happens any time an account holder disputes a valid transaction – either because they forgot about their purchase or recurring charge, they don’t recognize your business name on their report, or they simply have buyer’s remorse and don’t want to go through the proper channels to cancel their subscription.

In some cases, friendly fraud is far less friendly in nature, with legitimate customers intentionally disputing their charges—with the intent of reselling your products.

Friendly fraud continues to be among the top fraud trends for ecommerce merchants year-after-year.

Friendly fraud continues to be among the top fraud trends for ecommerce merchants year-after-year. It’s costly for multiple reasons – you’re out the products or services sold and shipped, shipping costs, and chargeback fees.

Relater Reading: Why Friendly Fraud May Be a Problem for Your Fraud Protection Solution

Account Takeover (ATO) Is Another Big Risk

One of the biggest threats to ecommerce merchants today, account takeover (ATO) fraud is a go-to for fraudsters and the perfect way to take advantage of subscription-based businesses.

Thanks to data breaches and hacks of big banks and social media giants like Facebook and LinkedIn, criminals get access to sensitive information for hundreds of thousands of consumers and can easily pretend to be valid customers.

It’s easy for consumers to overlook this type of fraud when the subscription cost is low. They may not even notice it until months in. And since most banks allow up to a year for a consumer to request a chargeback, online merchants may not recognize they have a problem with fraud until long after the first fraudulent purchase is made.

Gift Card Fraud Also Impacts Subscription-Based Merchants

Fraudsters have gotten pretty creative, especially as more consumers shop online. That extends to gift card fraud.

The way it works is criminals commit ATO or card-not-present fraud to buy gift cards online. Then they use those gift cards to make purchases – even ongoing purchases, if the gift card value is high enough.

Because the gift card is generally untraceable, it’s the perfect crime – the legitimate account holder has no way of cancelling the gift card. And during the purchase, the merchant has no way of knowing whether the gift card was purchased honestly or through fraudulent means.

What’s at Stake for Ecommerce Merchants?

In today’s social media-driven market, reputation is everything. That means a bad review or a bad reputation can sink an online business.

If enough consumers are burned by fraudsters via your company, consumers will steer clear of doing business with you and recommend that others do the same. You can lose your brand exclusivity and reputation, as well as sales.

If your subscription-based business experiences a high number of chargebacks, you can be hit with considerable penalties, and may even lose your merchant account altogether.

There’s something else you could lose as well. If your subscription-based business experiences a high number of chargebacks, you can be hit with considerable penalties, and may even lose your merchant account altogether.

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How to Protect Against Subscription Fraud

To fight subscription fraud, merchants need to understand the industry and pay attention to the initial transaction.

Focus on the First Transaction

Fraudsters often use subscription accounts to test a first transaction with stolen information. The lower purchase amounts allow them to slip under the radar. If they aren’t caught, the stakes will get higher as fraudsters expand to larger purchase amounts.

Fraudsters often use subscription accounts to test a first transaction with stolen information.

For that reason, we always start by carefully examining the first transaction from a new customer. Ecommerce merchants need to check the fraud rate for all first-time customers – not just their overall fraud rate. Any suspicious transactions or customer accounts should be flagged for manual review.

Without a thorough evaluation of the first transaction – no matter how small – merchants risk allowing fraudsters to gain trust and keep making purchases.

Pay Attention to Resellers

We’ve had specific situations with clients who accept debit and credit for exclusive product subscriptions, such as wine selections and the like. Fraudsters target these merchants in particular because their products resell easily. So, they can purchase products at a discount through the subscription and resell it for more money on the black market.

Another example is with book clubs and other creative content that is sold pre-release through a subscription. Fraudsters will purchase those products or downloads and resell them at a huge demand and increased price. Digital downloads, especially, can be resold almost as quickly as they are purchased.

Merchants need to be aware of what is happening on the black market – where the demand is and who is able to sell those products.

Related Reading: 7 Tips to Prevent Recurring Billing Chargebacks

Look Out for Changes in Customer Data

Of course, your customers will sometimes accidentally enter the wrong address or use the wrong credit card, but any of those situations should be flagged for review.

Why?

Because fraudsters often change payment method or delivery address after a purchase – once the screening has already passed.

Implement a Fraud Protection Solution

Working with a trusted fraud protection partner will give you the expertise and experience with the chargeback process, fraud trends, and resale data. It also offers a comprehensive fraud protection solution that uses trained staff and advanced artificial intelligence to evaluate the legitimacy of transactions and block fraud before it affects a merchant’s bottom line.

Overall, the key to preventing subscription fraud is balance. Online merchants need to know what good transactions look like, they need to analyze transaction data, and they must thoroughly screen new and changed accounts. Contact a ClearSale analyst today to learn how we can help ecommerce merchants defend their subscription sales against fraudulent transactions and chargebacks.

Small Business Ecommerce Protection

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