The digital goods market has seen a huge sales surge in recent months. While this might be an outward sign of a booming business, increased popularity doesn’t come without challenges. In this post, for instance, we’ll take a look at the growing problem of digital goods fraud, and how FIs can help manage this threat.

Where Fraud Comes into Play

The phrase “digital goods,” can refer to any non-tangible goods that are bought, stored, and used online. This includes anything for which the transaction happens online and the delivery is immediate. Digital subscriptions, eBooks, gift cards, and game codes are all digital goods. Perhaps the most appealing aspects of digital goods are their convenience; the buyer simply sees something they want and can gain instant access with just a click. Unfortunately, this is also part of the problem.

The immediacy associated with purchasing digital goods is a draw for fraudsters. Compared to other channels, it’s easy for fraudsters to complete a purchase, then vanish before anyone can intercept them. Plus, items like gift cards are easy to convert into cash.

Digital goods fraud is a different beast entirely from other types of fraud. Compared to attacks involving card-present sales and tangible goods, it’s more difficult to discover the identity of the fraudster in this space. Merchants also have a difficult task ahead of them in trying to pull together the appropriate documentation needed to dispute a digital goods chargeback.

One of the main issues is that many card-not-present (CNP) merchants have not fully updated their fraud detection and prevention methods to address new threats. Financial institutions need to be prepared to help their merchant customers identify and manage fraud. This is the only way to effectively reduce the overall cost of dispute management.

Can Merchants Fight Back Against Digital Goods Fraud?

The best way to combat the lack of available documentation is to identify fraudsters through emails and IP addresses, which can then be used to link a disputed charge to a card account.

In order to be better equipped to fight fraud, it’s important for CNP merchants to be aware of the weakest points in their system. You can help by highlighting the following problem areas that will require closer attention:

• Instant Delivery: Remind your customers that instant delivery provides little time for manual review. Since the purchase and authorization are happening in real-time, merchants are forced to make a rushed decision to accept the transaction.
• False Declines: Merchants often make the mistake of relying on strict rules to approve or decline an order due to their fear of fraud. This rigid structure can lead to a high number of false declines.
• Limited Data: With digital goods, there’s no data available to review, such as the customer’s phone number, delivery address, or prior purchasing history. This opens the door for fraudsters to pose behind fake email addresses or proxy servers.
• Customer Demands: As mentioned before, customers enjoy having their purchases on hand immediately. They want a fast and simple process, and when forced to wait for a confirmation email or code, the higher chance they will abandon their shopping cart and move on.

There’s no universally-applicable solution for these problems. Rather, merchants need to work to identify a strategy that will work best for them given the unique nature of their operations.

How Banks Can Help

As a financial institution, you can play a more direct role in helping to protect your merchants. For instance, we recommend that you encourage merchants to do the following to reduce fraud and limit chargebacks:

• Create multiple checkout stages online to limit the risk of real errors. This should be balanced to avoid unnecessary friction that could discourage buyers.
• Develop multilayered fraud screening filters. Using multiple complimentary fraud tools can help safeguard digital payments and intercept fraud without stopping genuine sales.
• Request that customers create an account before being able to complete a purchase. This can help deter bots and other quick-moving fraud attempts.
• Standardize and uphold customer service policies to provide consistent, fair, and personable service to customers.

These and other tactics can help limit the impact of criminal fraud. Even then, there are other factors to consider, like friendly fraud and family fraud. Incidents tied to each of these threat sources have increased due to consumers using the system for their benefit.

Adopting a chargeback alert system, as well as a more comprehensive plan to respond to friendly fraud, is one way for merchants to protect their businesses. They may be able to handle this in-house, but in many cases, turning to a third-party chargeback management service can offer the best possible return on investment.

It’s important that whatever strategy they put in place, merchants don’t make the mistake of alienating their customer base in the process. An effective strategy will find a balance between fraud prevention and customer satisfaction.

The growth of fraud and chargeback issuances in the digital goods space places a huge demand on the merchants’ resources. Fortunately, there are ways for these businesses to protect themselves. Ensuring a proactive and effective approach can help eliminate fraud and protect one’s business from insidious attacks.