Few industries are as vulnerable to financial risks as ecommerce, where losses due to fraudulent transactions alone were estimated to reach $48 billion globally in 2023. When you factor in the impact of other potential risks — like key business risks, payment processing errors, payment fraud, poor cash flow management, improper cash flow forecasting, and market fluctuations — ecommerce businesses can stand to lose millions (not including reputational damage) without proper risk management procedures in place.
In this comprehensive risk management in ecommerce guide, we’re diving into the most common financial and operational risks, along with helpful risk analysis and mitigation tips.
Article Contents
Understanding financial risks in ecommerce
Any business processing online transactions over the internet is at risk of inherent threats like malicious actors placing fraudulent orders or dishonest customers disputing authorized transactions. However, there are several types of ecommerce risks beyond fraudsters.
Take payment processing errors, for example.
Nearly a quarter of all ecommerce payment declines in online businesses occur because of incorrect payment information being entered into the system, which is a common administrative mistake. Other payment processing errors, like late presentment, can also occur from administrative oversight.
Over time, these various financial risks can disrupt your ecommerce operations and cause big financial losses. In the worst situations, it can cause your online business to be denied services if banks begin to classify you as a “high-risk business.” As a high-risk merchant, this means it can be harder to find a secure payment processing system. Even if you find one, you’ll likely pay higher e-commerce transaction fees with stricter contract terms.
Types of financial risks in ecommerce
In an industry as prone to financial risks as ecommerce, it’s vital to understand how to identify these six threats, from fraudulent transactions to fluctuating markets and everything in between.
Fraudulent transactions
Over 38% of all scams worldwide were attributed to online purchases in 2020, and today, fraudulent transactions account for three in ten ecommerce purchases. Unfortunately for ecommerce business owners, online fraud can take several shapes:
- Identity theft is when a cyber criminal steals a shopper’s personal information, like their name and credit card number, and uses it to make purchases or open subscription accounts in the victim’s name, often leaving the business liable for the fraudulent purchases.
- Card-not-present (CNP) fraud, sometimes referred to as card testing, is when criminals confirm stolen credit card details by making a series of small transactions, often purchasing more expensive items or higher quantities of items once the initial transactions go through.
- Account takeovers are when hackers gain access to legitimate customer accounts, often by experimenting with stolen user passwords sourced from the dark web and then making unauthorized transactions using the stored payment information on the customer’s account.
One of the best ways to spot fraudulent transactions is by comparing a customer’s recent purchases to their previous, legitimate orders. Suspicious activity can come in many forms, but sudden changes in order values and transaction locations, such as purchases coming from different continents in the same week, can be a sign of fraudulent activity.
It’s wise to invest in fraud risk management tools that help detect and prevent fraudulent transactions, like services that verify a customer’s billing address corresponds with their IP address. You can also deploy two-factor authentication at log-in to reduce the risk of account takeovers. These tools can also go a long way in improving consumer trust and increasing peace of mind, especially if you sell high-value items.
Chargebacks and disputes
Chargebacks occur when a customer’s bank directly reverses an ecommerce payment. Disputes occur when a customer files a complaint on a specific ecommerce transaction, often forcing the ecommerce merchant to directly resolve the issue with the customer through a refund or return.
Ecommerce businesses lose an average of $3.94 for every $1 filed through chargebacks and disputes. Being that more than half of customers file a chargeback without contacting the merchant, it’s wise for businesses to follow up before and after order delivery with a satisfaction survey email.
A customer satisfaction survey helps mitigate chargebacks by providing a chain of communication to confirm a customer purchased a specific item and allowing them to send complaints before issuing a dispute. Businesses can also discourage chargebacks with clear refund and dispute resolution policies.
Payment processing errors
Several factors can go awry when processing payments in e-commerce businesses.
The first is a no authorization payment processing error. This means your business did not have bank permission to process a customer’s transaction and the payment may be denied. Without authorization, you’re instantly financially responsible if the customer disputes the payment.
Another common payment process error is an incorrect transaction amount error, which occurs when the wrong data is manually entered into the system and customers are charged incorrectly. This error is typically a human mistake; however, it’s grounds for a successful customer dispute.
Late presentment is a similar human mistake that occurs when ecommerce merchants miss the deadline for submitting credit card transactions. The timeline for submittal varies depending on the specific bank policies and contract. Payments that are not submitted on time will face chargebacks.
The best way to mitigate payment processing errors like no authorizations, incorrect transaction amounts, and late presentments is to automate where possible and remain attentive otherwise. It’s best to be punctual and honor the various policies of the financial institutions you do business with.
Currency exchange risks
Currency exchange risks for ecommerce businesses are two-fold. On one hand, customers can deny a Dynamic Currency Conversion (DCC) feature, creating additional fees. On the other hand, global transactions may not always convert into local currency at a sufficiently high exchange rate.
Either of these instances can result in merchants not receiving the anticipated revenue from a sale. If your business processes transactions in multiple currencies, you can better accommodate international shoppers with payment processing software that accepts multiple currencies.
Robust payment processing software allows cardholder preferred currency (CPC) to simplify transactions. However, your business must be sure to specify any additional fees that may accompany payment in foreign currencies, otherwise, risk disputes from international shoppers.
Market fluctuations
Market fluctuations are an unavoidable strategic risk of being in business, no matter the industry. In ecommerce, specifically, shifts in the labor and transportation market as well as inflation in the supply chain constantly influence everything from inventory management to product pricing and customer loyalty.
For instance, an increase in transportation and delivery costs was a leading concern for international ecommerce merchants in 2023. Upon observation of inflating prices, which caused reduced profit margins for more than half of merchants, 80% increased their prices to stay afloat.
The only way to identify market fluctuations is to remain attentive, particularly when consumer spending begins to wane. To help mitigate revenue risks caused by financial restraints like inflation, it’s beneficial to offer various discounts and promotional offers that incentivize consumer spending.
Employee theft
There are two types of employee theft: physical theft, like stealing merchandise, and digital theft, like diverting funds from company accounts and collecting employee wages for unworked hours.
While it’s always recommended to forge a culture of trust with your employees, it’s also wise to put systems in place to monitor your assets. Create unique login credentials with multi-factor authentication for each employee, so you can easily see who accessed each system and for how long.
Likewise, invest in physical access cards or digital access codes. These methods record details for system access — and even physical access to inventory warehouses — so employees know that you’re aware of when they access internal systems and enter onsite merchandise storage.
Lastly, consider having a third party review your product inventory or audit your company’s books periodically. A fresh look at your financial records from an outsider’s perspective can help you spot and correct potential mistakes, as well as identify security gaps and subsequent employee theft.
General best practices for mitigating financial risks in your business
Though it’s impossible to completely eliminate financial risks in your business, you can safeguard your ecommerce operation from the above threats by adopting the following mitigation strategies:
- Implement robust fraud detection and prevention software. The ecommerce fraud detection and prevention market size is projected to triple in the next few years, offering automatic methods for merchants to verify customer and cardholder details.
- Utilize secure payment gateways and encryption technologies. Ensure that your payment processing system requires Card Code Verification (CVV) to limit fraudulent CNP transactions and Address Verification (AVS) to combat identity theft and account takeovers.
- Continuously monitor financial transactions and performance metrics for anomalies. Sudden spikes in transactions from areas of the world you typically do not do business in and suspiciously large transaction amounts can be indicative of ecommerce fraud.
- Establish clear refund and dispute resolution policies. At a time when the majority of customers file a dispute before contacting the merchant, it’s wise to create an easily accessible and clearly written refund policy to help discourage chargebacks and disputes.
- Diversity payment methods and currencies. Rather than establishing authorization with one or two banks, allow for multiple payment options — like digital wallets and buy now, pay later solutions — to make it simpler for real customers to complete transactions.
- Hedge against currency exchange risks. Deploy payment processing software that allows DCC and CPC features to simplify currency exchanges, and create a multi-currency account to consolidate various payment types in one account rather than multiple foreign accounts.
- Create contingency plans for market volatility. If the events of the past few years alongside current inflation rates have taught ecommerce owners one thing, it’s that you must have concrete plans to maintain cash flow and stimulate spending, no matter what.
- Regularly review and update risk management policies. One of the smartest ways to prevent future financial risks is to compile a list of past fraudulent transaction types, common chargebacks, and previous theft attempts, then include them in internal policies.
- Foster a culture of risk awareness and accountability within the organization. Limiting financial risks in ecommerce business relies on teamwide effort, meaning owners and managers should provide staff training to recognize common risks and online schemes.
- Stay informed about emerging threats and industry trends. Modern cyber criminals and fraudsters are anything but consistent. While their mission remains the same, their threats and points of system entry update constantly, meaning you must remain informed.
The bottom line
From chargebacks to market fluctuations, every ecommerce business is vulnerable to the same financial risks. Fortunately, you can protect your customers — and your company — with these risk mitigation techniques.
