Security & Fraud

Why Online Retail Fraud Is On the Rise

laptop hack credit card

Amazon has struggled with preventing counterfeit goods from infiltrating its marketplace. In the company’s ongoing efforts to prevent fraud on its site, Amazon announced a new program, Intellectual Property Accelerator, last month to help sellers make sure their products won’t be copied or counterfeited.

From counterfeiting to identity theft to phishing attacks, digital fraud takes many forms — and online shopping continues to make consumers and merchants vulnerable to such attacks.

According to a new LexisNexis study, overall retail fraud attempts doubled year-over-year and tripled since 2017. By its measures, merchants pay $3.13 per lost dollar on average, up from $2.94 last year, a 6.5 percent increase. The rise of mobile commerce and selling of digital goods has added to retailers’ fraud problems. The average monthly fraud volume rose 133 percent for mid- to large sized retailers selling digital goods through the mobile channel.

The rise in fraud is not going unnoticed by the Federal Trade Commission (FTC), however, which noted that millennial consumers are especially vulnerable to fraud, losing $450 million to fraudsters in the past two years, of which $71 million was lost in online shopping scams.

The latest Digital Fraud Tracker explores how technologies like artificial intelligence (AI) and machine learning are helping retailers better defend their customers.

International Issues

According to the PYMNTS Securing B2B Payments Report, criminals last year successfully made off with $4.2 trillion from the worldwide economy.

International eCommerce can cause problems, as can transacting with emerging markets, which are adopting card and digital payments that create fresh targets for fraudsters. Rahul Pangam, co-founder and CEO of fraud detection services firm Simility, recently spoke to PYMNTS about fighting fraud in emerging and developing markets, which aren’t one and the same.

In these markets, fraudsters can find loopholes — stemming from the fact that retailers that accept cards don’t want to create too much friction for consumers. Not only that, but fraud alerts and prevention have yet to catch up to the rapid rise of digital payments, providing more opportunities for fraudsters.

Fraud protection provider Kount and all-in-one payment platform BlueSnap released a new report that found global eCommerce will top $3 trillion this year for the first time, with international consumers increasingly shopping online. In fact, North America’s top 1000 online retailers have sold $143 billion worth of goods to customers outside the U.S., and more than half of online shoppers have already purchased goods outside their country.

Retailers rightly see the opportunity in international ecommerce: 67 percent agreed with the statement that selling online across borders “is a critical source of our ecommerce growth in the future.”

However, retailers are missing out on this opportunity due to fraud concerns. Fraud prevention (60 percent) tied with currency and payment processing (60 percent) as the top challenges preventing retailers from selling goods online cross-border. Additionally, over one-third (34 percent) agreed that international ecommerce is too risky due to fraud.

These fears aren’t completely unfounded.

A new study found that from June to August 2019, an average of roughly  $160,000 fraudulent transactions per month were reported by businesses, including retail and eCommerce, in APAC.

Asia made up the largest share of fraud costs (28 percent) for U.S. mid- to large-size online retailers that sell internationally, while Europe, including Russia, also made up 28 percent of fraud costs.

The high cost of fraud is evident in Europe, where the European Central Banks estimates fraud-related losses total $2 billion each year, with card-not-present (CNP) fraud posing the greatest risk. The rise of cross-border trade are giving fraudsters new opportunities to steal funds and data.

Retail Fraud Prevention and Solutions 

Online merchants must ensure their platforms are trustworthy if they want users to feel safe. According to digital P2P marketplace OfferUp General Counsel Nathan Garnett, the firm relies on both machine learning and human analysts to improve its anti-fraud responses.

OfferUp uses AI and machine learning to monitor in-app language to flag suspicious behaviors, and encourage smarter and safer decisions among its users. The solutions monitor messages exchanged in the chat feature, such as those from users who are encouraging others to take conversations offline via email or phone numbers instead.

The LexisNexis study found that friendly or first-party fraud caused the greatest share of loss (38 percent) among mid- to large-size online retailers, while synthetic IDs caused nearly as much (36 percent). Third-party account takeovers were only responsible for 7 percent of fraud losses.

The LexisNexis study found lower usage of advanced identity and transaction solutions among mid- to large-size online retailers. Fewer than half (41 percent) use real-time transaction scoring and automated transaction scoring (41 percent).

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NEW PYMNTS DATA: HOW WE SHOP – SEPTEMBER 2020 

The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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