Deep Dive: How Online Retailers Kept Fraudsters From Having A Merry Little Christmas

The holiday shopping season is the most wonderful time of the year for the retail industry.

Brick-and-mortar merchants and online retailers alike often rely on end-of-year sales to generate up to 40 percent of their annual revenues and start the new year on a positive note. A notable $730 billion in U.S. retail sales occurred in the last two months of 2019, marking a year-over-year increase of 4.1 percent. eCommerce’s market share has been steadily increasing over the past decade, and 15 percent of total holiday retail took place online in 2019, up 19 percent from 2018.

The 2020 holiday season has been vastly different from seasons past, however. Amid the pandemic, social distancing and stay-at-home orders kept shoppers away from brick-and-mortar stores, and the resulting economic downturn left consumers with less disposable income. U.S. consumers were expected to spend more than $190 billion online this season, up 36 percent from 2019, while in-store commerce was predicted to fall by 4.7 percent. The 2020 season also started earlier and lasted longer, with many merchants beginning to offer holiday deals in October to take advantage of shoppers’ cabin fever.

The shift to eCommerce has unfortunately come with an uptick in fraud, with bad actors turning to item-not-received schemes, false chargebacks and other abuses that scam retailers without the means to verify such claims. The following Deep Dive explores the fraud threats that are plaguing eCommerce merchants this holiday season as well as the security tools they are deploying to fight them.

How Fraudsters Tried To Steal Christmas

Fraud rates have hit record highs during the pandemic, even though they have been trending up for a long time. A study found that almost half of all companies worldwide have experienced fraud in the past two years, and the average firm was targeted by six confirmed incidents over that span.

One of the most prevalent fraud types is chargeback abuse, which cost merchants $35 billion in 2019 alone. Such schemes entail customers falsely reporting that they did not receive deliveries or that they were unsatisfied with the products, then demanding refunds in an effort to obtain the items for free. Some customers dispute these charges with their credit card providers instead of the retailers that are involved, but sellers are left facing the losses either way. Item-not-received claims increased by 67 percent in October 2020 compared to the same month in 2019, and the surge in online orders during the holidays means this problem has likely become worse.

One might think that this uptick in fraud is due to small, dedicated cabals of fraudsters, but such schemes generally originate from customers of all stripes. A study found that 36 percent of customers in the United Kingdom have tried to receive free merchandise by filing false claims, such as claiming their orders were placed by thieves and asking their credit card providers for refunds. Another 32 percent of consumers admitted to breaking discount or promotion rules that were intended to be used only once or by first-time customers. The same survey found that just 8 percent of customers had conducted such schemes in January 2019, with this share skyrocketing throughout the pandemic and into the holiday shopping season.

Keeping Companies Safe

Retailers, merchants, restaurants and other businesses vulnerable to false chargebacks and item-not-received fraud have leveraged numerous tools to combat these scams during the holiday season, including some built into customers’ payment cards.

One effective option is to leverage card verification value (CVV) codes, which are printed on the back of most credit cards to add security and certify that customers have willingly placed orders. These codes cannot be stored in retailers’ online ordering systems and are thus far less likely to fall into fraudsters’ hands than credit card numbers, ZIP codes and other personal information. Tapping CVV codes can make chargeback disputes significantly easier for retailers to win, as they essentially prove that customers authorized transactions. This may not eliminate all forms of chargeback abuse but can help shut down many attempts.

The best method for preventing customer-generated fraud this holiday season came from trust rather than technology, with retailers encouraging customers to settle disputes directly rather than contacting their banks or credit card companies. Merchants can institute various policies to foster this trust, such as providing post-transaction feedback forms for customers to fill out. This can expose potential chargeback-provoking issues before they occur and demonstrate to customers that merchants are willing to listen to their complaints and act.

The uptick in fraud over the past year has stress-tested merchants’ online fraud prevention systems, exposing weak points and enabling retailers to leverage new tools to strengthen their defenses. The fraud-related lessons merchants have learned this holiday season — and the measures they have taken to thwart such schemes — will likely serve them well as they battle future scams.