Interview

Navigating fraud in ecommerce during Valentine's Day in 2024

Wednesday 14 February 2024 13:42 CET | Editor: Irina Ionescu | Interview

Fraud Specialist Brian Davis discusses the state of fraud in the US during this year’s Valentine’s Day, emphasising on the increase in chargebacks and romantic scams.


The holiday shopping season is not over, with merchants already preparing their platforms and brick-and-mortar stores with fresh new offers on Valentine’s Day. As this celebration continues to be a big hit, especially in the US, what are the main challenges merchants and online selling platforms deal with? 

The retail landscape experiences a predictable yet challenging cycle each year, marked by a surge in holiday sales that transitions into a period fraught with increased chargebacks and returns. This cycle kicks off with the anticipation and preparation for major shopping events, leading to a significant uptick in transactions as consumers eagerly purchase gifts and take advantage of holiday deals. The aftermath of this shopping spree often leads to a less desirable phase: a spike in chargebacks and returns. 

January and February emerge as critical months when customers reevaluate their purchases, resulting in an influx of returns for unwanted gifts and disputes over charges. This period demands meticulous management from retailers as they tackle the dual challenges of resolving disputes and preparing for the next significant sales event.

As for Valentine’s Day, the shift from holiday highs to chargeback lows, only to pivot swiftly in preparation for Valentine's Day, underscores the retail rollercoaster. Retailers must address the immediate concerns of chargebacks and returns while also capitalising on the upcoming Valentine’s Day opportunity. This cycle highlights the essential roles of effective fraud management and operational agility.

As retailers grapple with high volumes of transactions and the subsequent increase in chargebacks, the limitations of manual reviews become increasingly evident. Delays, human error, and the challenges of scaling effectively in response to fluctuating demands underscore the need for a more sophisticated approach to fraud management.

The most compelling advantage of automation is its scalability. As transaction volumes grow, automated systems can easily adjust, maintaining high levels of accuracy without the need for proportional increases in staff. This scalability is crucial for handling peak shopping periods and the associated spikes in chargebacks, providing retailers with a robust defence against fraud that grows with their business. 

Automation leads to substantial cost savings. Reducing reliance on manual labour not only trims staffing expenses but also diminishes financial losses linked to fraud and chargebacks. Leverage technology to automate routine and predictable tasks, allowing algorithms to excel in their domain of heavy lifting. This strategic move frees our human investigators —the real experts— to dive into areas requiring deep insight. By offloading routine tasks to technology, our experts can concentrate on complex fraud detection and customer interaction, where human judgement is invaluable.

And this is how we strike a balance. Smart automation for efficiency and expert humans for insight. This balanced approach not only streamlines operations but also enhances customer trust and satisfaction, laying a foundation for sustainable growth and resilience in the ever-evolving retail landscape.

What are the most common types of fraud end-users must be aware of during this time of the year and, subsequently, how can merchants protect their business against fraudsters?

Map your user journey to uncover risks. Navigating through the customer journey isn’t just about enhancing user experience — it’s a strategic approach to uncover hidden risks. 

Each stage of the journey, from the moment a customer lands on your site to the post-purchase follow-up, holds potential vulnerabilities. For example, at the account creation phase, fraudsters might use stolen identities to set up fake accounts. By mapping out these stages, you can pinpoint where your defences might be weakest. Fraudsters are not just opportunists - they are strategists employing multipoint attacks and automated scams. Understanding that these attacks are both sophisticated and automated highlights the necessity for an equally sophisticated defence. Investing in advanced fraud detection systems that use machine learning can help identify and mitigate these risks in real-time.

An eloquent example in this case would be the following situation — an online retailer noticed an uptick in fraudulent transactions originating from newly created accounts. By analysing the user journey, they identified a lack of verification at the account creation stage. Implementing an SMS verification step drastically reduced fraudulent account creation without deterring genuine customers.

Despite the continues growth of ecommerce, 2023 was a struggling financial year for many businesses. As prices for products continue to increase and consumers tend to be more financially responsible with their spending, will there be a surge in certain types of fraud merchants must be aware of?

Two specific types of fraud that merchants should be particularly vigilant about in such an economic environment are return fraud and chargeback abuse. 

These fraudulent activities can significantly impact a retailer's bottom line, especially as consumers become more price-sensitive and may resort to unethical practices to save money (this is not financial advice). Return fraud occurs when customers exploit return policies to benefit from the merchandise without paying for it. This can include returning used or damaged items, using receipts to return stolen goods, or wardrobing (buying with the intention of returning after use).

Chargeback abuse, (or ‘friendly fraud’ or ‘first-party fraud’) involves customers disputing transactions with their banks instead of seeking a refund directly from the merchant, often claiming the product was never received, was unsatisfactory, or simply was  a fraudulent transaction.

As consumers look to stretch their budgets further, some may turn to deceptive refund practices. This not only leads to direct financial losses through refunds but also adds costs associated with restocking, repackaging, and, in some cases, writing off unsalable returned merchandise.

Finally, are there any new emerging trends that you see shaping the fraud industry in the upcoming months/years? If so, can you share some common-practice tips to make fraudsters’ playground less accessible? 

With the complexity of online fraud escalating, merchants find themselves juggling an average of four to five fraud prevention vendors to tackle their fraud concerns effectively, as highlighted by a survey from the Merchant Risk Council (MRC). 

This multi-vendor approach, while comprehensive, often results in fragmented data and operational silos, complicating the fraud management process and potentially leaving gaps in the defence strategy. A consolidated approach offers a holistic view of fraud threats, enabling merchants to make informed decisions swiftly and accurately. By integrating data from multiple sources, businesses can leverage deeper insights, improve detection accuracy, and enhance their ability to predict and prevent future fraud attempts.

In response to the challenges of managing multiple fraud prevention vendors and data fragmentation, some enterprise ecommerce companies are taking matters into their own hands by building in-house solutions. These businesses are investing in dedicated engineering teams tasked with developing bespoke fraud management systems tailored to their specific needs. This approach allows for greater control over fraud detection mechanisms and the flexibility to adapt quickly to emerging threats.

For retailers without the option to build in-house, leveraging a consolidated fraud management platform offers a viable and efficient alternative. These platforms provide the sophistication and comprehensiveness of a custom-built system with the added benefits of cost-effectiveness, ease of implementation, and ongoing support. 

By choosing a platform that integrates seamlessly with existing systems, merchants of all sizes can enhance their fraud defence mechanisms, ensuring the speed to keep up with the evolving landscape of online fraud.



About Brian Davis 

Brian builds fraud teams from scratch. He likes to call it organising the chaos. Now he gets to be an extension of fraud teams and help them build out their strategy to scale fraud to align with their companies’ lofty goals. His internal goal is to help the community to find their voices and be seen as the true experts they are. Fraudsters work together, so it only makes sense we do too!


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Keywords: fraud detection, online fraud, ecommerce, chargebacks, scam, romantic scam, fraud management
Categories: Fraud & Financial Crime
Companies:
Countries: United States
This article is part of category

Fraud & Financial Crime