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The key features of fraud for the digital goods industry

Thursday 5 July 2018 | 07:53 AM CET

Gerry Carr, CMO of Ravelin, provides insights into digital goods transactions, outlining the key features of fraud for this industry

The characteristics of digital goods transactions

The term digital goods refers to goods that are stored, bought and used online. These can range from online subscriptions, game codes, credits, ebooks to gift cards - basically anything that involves an online transaction and an immediate delivery. So in order to succeed in this space, it’s vital that the user journey is as seamless as possible. Account creation is key too. Although one-off purchases are possible, these services make far more money either from repeat buyers or from subscribers. Consequently, the security of those accounts is very important.

The popularity of digital goods and the increase of online retailers providing them has inevitably resulted in an increase in fraud, with fraudsters trying to exploit the weaknesses in the merchants’ security systems.

Why are digital goods so attractive to fraudsters?

Fraudsters have detected several vulnerabilities in a merchant security system. For instance, digital goods prize speed and convenience as a driver of sign-ups can be read by an attacker as a weakness. In addition, the majority of digital goods is now purchased with card not present (CNP) on tablets, online and mobile devices. Therefore, the ability to steal accounts and re-sell the details online is a massively growing illegal industry. That’s outside of gamers and others simply stealing the digital goods for their own use using stolen card details or other sensitive data.

Demographically, gamers of all consumers have the most in common with online fraudsters. And sociologically, the success of Pirate Bay and other illegal Torrent sites has largely removed any social stigma associated with stealing online IPs. The chances of prosecution for anyone engaging in the business are minimal.

 “Retailers of digital goods are spending up to 20% of their
operational budgets on fraud and chargeback management”

Clearly, digital goods merchants need to look after their own houses; and the costs are enormous.

Javelin Research reported that compared to 2016 data, chargeback losses, which occur when merchants end up footing the bill for legitimate consumers in the case of friendly fraud or fraudster purchases, “has increased by 60% among digital goods merchants”.

Moreover, false positives, which occur when merchants mistakenly decline legitimate transactions, “increased by 25% among digital goods merchants and 27% among physical goods merchants. Retailers of digital goods are spending up to 20% of their operational budgets on fraud and chargeback management.”

Another Javelin Research report has revealed that fraud now consumes 8% of the average ecommerce merchant's revenue stream, and 9.7% of revenue among merchants who sell only digital goods, such as ebooks, e-tickets, and other instant download items. The average ecommerce merchant now devotes 21% of its operational costs to fraud management.

Key features of fraud for digital goods business

Here are some specific fraud risks that need to be mitigated or considered in any fraud defence for a digital business:

1. Automated Fraud Attacks: With immediate fulfillment and absence of any supply constraints, a successful exploit by a bot or similar can rapidly escalate to a huge chargeback or account compromise problem.

2. Friction sensitivity: No business wants to turn away good customers. However, digital goods customers are especially fickle and a false refusal will usually mean a permanently lost customer. This impacts the amount of friction a merchant can add to a process.

3. Limited data: Compared to a company selling physical goods or a service, there is less traditional data for a fraud screening system. This requires better use of the existing data.

4. Mobile purchases: For some businesses, the entire sales volume is in-app. At the very least, any fraud detection system needs to be excellent at making the most of the data that a mobile experience provides.

Fraud detection traditionally is done by heuristic rules, and then followed by manual review of the transactions that fell foul of these rules. This puts an enormous burden on the merchant to both maintain the rules and guarantee the quality of the review. It may surprise many to learn that this is still the prevalent approach to online fraud detection.

In digital goods, this approach is not even possible. As mentioned, the key to competing in this market is instant fulfillment. A customer needs to feel that their order is fulfilled and complete, safe and secure. Therefore, the fraud check needs to happen in the moment of ordering, and the only way to do this successfully is with an automated fraud detection system that uses machine learning to predict and prevent the transactions that are likely to end in fraud.

This article is an introductory piece to our in-depth guide on fraud detection for digital goods. To learn more, download the free online guide here or get in touch with one of our team members.

About Gerry Carr

Gerry is CMO of Ravelin, which provides fraud protection for online businesses. He joined Ravelin from its inception to help define and articulate a product vision for the changing face of fraud in ecommerce. Prior to Ravelin, Gerry has led the product marketing functions for products as diverse as Ubuntu and Sage CRM.

About Ravelin

Ravelin prevents fraud and protects margins for online businesses. Companies all over the world are accepting more transactions with fewer chargebacks thanks to our unique machine learning-based approach to fraud prevention. By automating standard fraud tasks, fraud teams can spend time focusing on the root causes of fraud instead of day-to-day review of transactions.

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