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When Payments Fraud Hovers Nearby

 

Hoverboards and payments security: two topics one might not suspect to find in the same sentence — unless you’ve been following the recent stories surrounding the high levels of fraud hitting the niche industry.

In one of the most high-profile cases, rapper Soulja Boy may have suffered as much as $175,000 in fraudulent online purchases of his hoverboards, Soulja Boards. According to some estimates, as many as 75 percent of the sales of the boards on his site were attributed to fraudulent cards over a five-month period.

MPD CEO Karen Webster recently had the chance to sit down with Ralph Dangelmaier, CEO of BlueSnap, to talk about the security lessons online merchants can take from this still-evolving story.

Starting with perhaps an obvious question: How could this have happened to such a degree?

“The biggest problem is the fraud engine that was looking at fraudulent cards was either not implemented correctly, or not working correctly for him,” says Dangelmaier. “It’s unexplainable that it would happen over such a period of time with such a high dollar amount. There was something amiss there.”

Indeed there was, and as Dangelmaier suggests, the high number of people contacting the merchant to request refunds should have been a leading indicator that there was something amiss.

“That should have started happening early on; the merchant notices something’s wrong and they need to take some action,” comments Dangelmaier. “Perhaps Soulja Boy’s experience may not be in merchandising or looking at financial statements, but my assumption is there had to be a quite a bit of notification of people calling up [their card issuer] and saying, ‘Hey, this fraudulent charge is on my credit card,’ and it should have alerted him to do something quite differently.”

There has been coverage in recent weeks of the increasing number of issues with hoverboard design and construction as well as a ban of the devices from many airlines. However, they remain increasingly popular — especially among younger millennials — and demand a premium price. Soulja Boy’s boards are priced around $1,500 each.

For these types of expensive online purchases, as Dangelmaier points out, there are often additional security checkpoints in online transactions. “Merchants can definitely set that up for purchases over $1,000, over $2,000, or $5,000 where there is additional authentication required,” he remarks.

Additionally, Dangelmaier explains that oftentimes, fraudulent transactions happened in quick succession using the same card – and if that was the case, that could have also been an indicator that something was amiss.

“A lot of times, some of those transactions — especially if it happens rapidly – are being used with the same card was being used across multiple sites, there should have been some kind of report going out identifying this kind of behavior,” he tells Webster. “It would go in something called a merchant review that would involve some of these transactions being sent back to the merchant to ask if it looked accurate to them. So there could have been some breakdown in communication if that were the case.”

As for whether Soulja Boy has any recourse in recovering the $175,000 they are out, the outlook is not good for the rapper turned online merchant, in Dangelmaier’s view.

“I’m not sure he can get his money back,” Dangelmaier explains. “Unfortunately, as you know the cardholder is calling the issuer, saying ‘I did not make that charge,’ so the cardholder is exempt from the charge, and Soulja Boy shipped the product, so the merchant is the one left holding the bag, so to speak, and is out the money.”

What lessons can other online merchants take from this case?

Dangelmaier urges merchants to ask their processor more questions about fraud and how it can impact them.

“Very few merchants ask questions about how fraud works when they sign up to do online processing and it’s worth asking a couple of questions,” he says. “I think secondly they need to have a process to review sales, review deposits to their bank account and immediately review any refunds and chargebacks and take those seriously, because that’s going to be the first indication that something’s wrong.”

These reports are not always the easiest to read, however, and another issue that this case points a spotlight on is the need for more accessible reporting and dashboard technology that can help processors navigate complicated statements and focus on the pieces of information that could potentially have the biggest impact on their bottom line.

Another key component here is merchants getting the right education around fraud.

When asked about the conversation around fraud at the time of onboarding at BlueSnap, Dangelmaier points out that this can be a key moment to have important conversations. However, he also mentions that when it comes to talking about fraud, “most of the small to mid-sized merchants don’t ask, but every time we onboard a merchant we make them go through a questionnaire where they understand what reporting they should look at. We actually talk to them about how we’re using the fraud tool with the information they’re giving us through the API.”

“Sometimes it’s a short conversation, sometimes it’s a long conversation,” explains Dangelmaier. “We feel it’s really important that a merchant understands how we’re looking at these transactions as they’re being processed. It’s an important part of the onboarding.”

In the end, even though it’s an unfortunate situation for the rapper, Soulja Boy’s high public profile may actually help to bring more attention to this pervasive issue.

Concludes Dangelmaier: “I think this is getting the attention it is because of the celebrity status of Soulja Boy, but this is happening to hundreds of thousands of merchants and they don’t have a voice in the public like he does.”

Lesson learned, perhaps the hard way for Soulja Boy, but hopefully one that can lessen the blow for others.

 

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