Why selling digital goods makes you a target for fraudsters

In ecommerce, digital goods are a favourite target for fraudsters. Part of the reason why is that once the item is sold, it is immediately delivered and there’s no turning back. How can businesses mitigate fraud risks when selling digital goods?

In 2021, global e-commerce losses due to online payment fraud were estimated at $20 billion. One product category in which fraud is becoming an increasingly difficult problem to handle is digital goods. 

 

What are digital goods?

Digital goods is a term commonly used to describe intangible products and services that can be acquired and consumed online. The fulfilment process is fully digital and occurs in real-time. Examples of digital goods and services include:

  • Prepaid phone credit
  • Digital gift cards
  • Game vouchers
  • Media files
  • E-books
  • Fonts
  • Digital subscription services
  • Internet coupons
  • Virtual goods / in-game items
  • Online courses
  • Music & video streaming services
  • Website themes etc.

Why digital goods are considered risky?

In more traditional forms of order fulfilment, the merchant ships a physical item. This means there are a lot of manual steps involved. Though unlikely, there’s always a fighting chance that the merchant can detect the fraud in time. Allowing the merchant to alert the authorities that a shipment is headed towards a fraudulent buyer. If caught early, perhaps the merchant can even put a halt to the packaging and shipping process of the item. 

In the case of digital goods, however, the digital good is delivered in real time on-page or via e-mail, and can thus be redeemed very quickly by the fraudster. Once a digital product, e.g. prepaid top-up credit, digital gift card or game voucher has been redeemed, there’s very little a merchant can do as digital goods fraud happens in the blink of an eye. Therefore, it is crucial that businesses selling digital goods detect fraud in real-time and respond with precision to protect their business from fraudsters. 

How digital goods fraud is done?

When it comes to digital goods, the goal of the fraudster is usually to gain access to the product, without actually spending the fraudster’s own money. One way to refer to this is CNP (card not present) fraud. 

Most commonly, fraudsters will use legitimate stolen customer information in order to evade detection when making purchases. However, there are also many incidences of ‘friendly fraud.’ For example, buyers may forget what they ordered or fail to recognize the merchant’s charge on their credit card statement. Thinking it may be fraud, they report it as unauthorized and their issuing bank initiates a chargeback. 

Sometimes friendly fraud isn’t really friendly at all. Friendly fraud can also be done on purpose, as a nefarious means to receive an ill-gotten refund after making a digital goods purchase. 

Tip: For a broader overview of online fraud types and how they happen, be sure to read our Online fraud handbook

What are the consequences of digital goods fraud?

The pain for the merchant comes later in the form of costly chargebacks, the settling of payment disputes and the loss of product revenue. Not to mention, the reputational damage that usually follows. 

It is important to stress that the risks of digital goods fraud extend beyond that of sunk costs related to product revenue, chargebacks, disputes and reputational damage. When an online merchant has high fraud rates, they are at risk of being deplatformed by the likes of PayPal and credit card acquirers. This reduction in payment methods leads to an additional, rather permanent, drop in sales.

Getting out of this hole is often very difficult for merchants, as they usually lack the personal connections and relationships required to get things resolved when dealing with payment companies and acquirers. 

How to stop fraudsters from getting away with your digital goods?

As a seller of digital goods, the only way to really protect your businesses from fraud is by making use of intelligent, lightning-fast fraud protection. Every single transaction needs to be checked, without increasing the number of false declines or negatively impacting the customer’s checkout experience in any way. 

At Alphacomm, we have developed Protectmaxx for this very goal. Protectmaxx is a robust anti-fraud API that seamlessly integrates with any ecommerce platform. Depending on the business needs, Protectmaxx can be used for either advanced fraud scoring or as a premium solution that provides full indemnification via a 100% chargeback guarantee that is unique in the industry.

Is Protectmaxx right for your business?

When do you know it’s time for your business to implement advanced fraud protection? It helps to talk it over with an expert. Get in touch with an Alphacomm revenue ambassador today. We’ll advise you on the best course of action, and even set you up with a free trial of the industry-leading Protectmaxx fraud protection API. 

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