" class="no-js "lang="en-US"> Combatting false positives and fraud this holiday season
Wednesday, November 30, 2022

Combatting false positives and fraud this holiday season

by Christian Mangold, CEO Fraugster

Retail sales during Black Friday and Cyber Monday (BFCM) increased by 16.1% in 2021, totalling $1221.82 trillion. Out of these, ecommerce sales specifically climbed up by 15.5% reaching $235.86 billion. Given the massive volume uptick it is key for retailers to be prepared to handle increasing customer demand.

But online retailers aren’t the only ones gearing up for the holiday season. Increased sales and revenues for merchants during the holiday season also gives way to increased fraud rates. Online fraud attempts in 2021 rose by 25% from fraud levels seen in 2020. In the USA alone, 19.66% of total e-commerce orders were suspected to be fraudulent.

Peaks in order volumes during the holiday season lead to a unique situation where a merchant’s fraud team is overworked, thus reducing their ability to manually review orders. On the other end fraudsters leverage the perfect opportunity to hide in the crowd and defraud merchants and customers easily. It is thus key to be aware of common fraud techniques employed by fraudsters and how merchants could prepare against them.

Common fraud patterns during the holiday season:

Synthetic Identity fraud: This involves fictitious accounts being created by fraudsters by combining stolen and fake user and payment information such as name, social security numbers, shipping address, and other card details. Separating genuine customers from such fake accounts becomes increasingly difficult during the holiday season, as regular customers also display unusual behavior by spending more than usual or purchasing an item they wouldn’t usually buy. A peak in newer customers coming to avail attractive discounts also makes identity fraud difficult to prevent.

The devil in such cases is in the detail. Increasingly this means using network intelligence to list suspicious transactions engaged in by the fraudster using the same shipping address, IP or email address. Machine learning assessing over hundreds of data points can further aid in spotting mismatches in shipping address, device location and IP location at scale.

Phishing: This refers to fraudulent emails sent by fraudsters while posing as reputable companies in order to lure individuals to click on malicious links by promising large discounts. Chances are that your favorite merchant is not offering a 80% discount on newly released smart TV or gaming consoles. Apart from discounts, fraudsters often send fake order tracking emails or messages to genuine consumers and defraud them.

Last year, a predicted 40 million text messages and emails with malicious links were sent out to unsuspecting customers. It is thus important for customers to recheck the email address or the phone number of the sender before clicking on unknown links.

Reseller Fraud: Fraudsters often leverage technologically advanced bots to automate account signup and checkout process, scan for attractive discounts on specific products and buy up such highly sought-after products in bulk – leaving genuine shoppers empty handed.

Buying the items in bulk further creates a supply shock, which can be leveraged by fraudsters to resell the purchased items at inflated prices. Holiday shoppers ticking off their shopping lists are bound to succumb. The merchants lose out on their cut of the profit in such situations. It is thus key for merchants to leverage fraud prevention solutions with advanced AI and device identification features to identify fraudulent buyers and bots.

Promotion abuse: Fraudsters and genuine users may set up multiple accounts to take advantage of the massive one-time offers and signup bonuses during the holiday season. Such fraudsters can be spotted using network intelligence and data enrichment that would aid in identifying customers based on their card information, the same IP address or device, etc.

Action plan for merchants during the holiday season:

Increase in frictionless commerce and one click checkout has made combatting holiday season peaks in fraud even more complex for merchants. They must be cautious while adding additional authentication such as 2FA/MFA, as this may lead to increased friction for customers and eventually high rates of cart abandonments. This can cause severe financial damage to the merchant.

On the other hand, putting more stringent fraud rules could lead to customers being declined wrongfully, which in turn significantly hurts customer experience and causes harm to the merchant’s reputation.

In such a scenario merchants must take preventive actions that don’t create additional friction for customers or increase false positives. Some of these include:

Estimate uptick in traffic and keep relevant teams in the loop: Deals and bonuses are bound to drive up traffic. It is thus important to speak to teams at the front line including risk, IT, sales and customer service teams. Having estimations of increased traffic based on past years’ data could further help estimate personnel requirements better and thus have a strong combat strategy.

Be prepared to manage rise in first party fraud (aka friendly fraud):

Friendly fraud attempts or false chargeback claims have risen in the past and cost merchants 2x the original transaction value. The current recessionary environment and the added need to maintain a lifestyle, especially during the holiday season, may further incentivise even genuine customers to file false chargeback claims. Delivery delays and lack of proper communication from the merchant, which may be common during periods of high order volume may further trigger this.

Some preventative measures that could be taken by merchants in such a scenario could include maintaining lists of previous offenders and blocking such transactions or having accurate merchant and billing descriptors for increased transparency.

Be prepared for increased returns: Last year returns surged by 129% YoY during Black Fridays. Having a transparent and flexible return policy and dedicated customer teams can help merchants deal with returns more efficiently.

What to expect in 2022:

In light of inflationary pressures in 2022, consumers are expected to be more price conscious. While this could impact certain product verticals, it isn’t expected to put a significant dent in overall holiday sales. Overall retail sales are expected to rise by 3.3% to $1.262 trillion, with e-commerce sales specifically increasing by 15.5%.

Alternative forms of payment and omnichannel commerce being the norm would also contribute in driving up sales volumes by making the customer journey even more seamless. Buy Now Pay Later (BNPL), known to increase average cart values by 30% – 40%, could further enable merchants to drive up sales volumes along with increasing the average order value, during this holiday season.

Good tidings for the holidays

A mix of high demand, first-time customers would lead to seasonal increases in phishing, malware, and fraud attempts during this holiday season. To avoid fraud losses, costly chargebacks and false declines, it is essential to have a robust fraud prevention system in place. Fraugster solves these challenges with a scalable solution that leverages advanced machine learning and AI that takes only 15 milliseconds to gain a 360 degree view of the customer and transaction. Whitebox AI further enables analysts to understand the factors influencing risk scores and customize rules seamlessly for better accuracy and lower false positives.

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