3 Actions Retailers Can Take Now to Reduce Holiday Fraud Losses
Fraudsters of all stripes are at their most active in the fourth quarter of the year. There are several proactive measures that retailers can put in place to lower the volume of fraud, and my advice is to get this plan together by the end of Q3 so as not to rely on last year’s now outdated strategy. But what can retailers do to balance the risk of fraud with the imperative of providing the best customer experience?
Here are our top three suggestions to help retailers ensure they’ve got the most robust and accurate system in place to detect, assess and prevent holiday fraud, without losing out on legitimate customer transactions:
1. Make sure you’re looking at the right things. Retailers need to track the chargebacks they’re getting in order to understand what fraud looks like specifically for their business. Every merchant’s experience will be different, so it’s important to understand what’s unique to your organization, and what your specific vulnerabilities are.
There are some common flags for fraud. Multiple orders from the same entity in a short period of time should raise suspicion, as should several orders going to the same shipping address but paid for with different credit cards. However, there are often inconsistencies with transactions that are less obvious. I’ve had retailers tell me that only 10 percent of their customers ask for expedited shipping, but 60 percent of their fraud risks ask for expedited shipping. So knowing the common red flags across the industry is important. However, it can be challenging to pick these out while the transaction is happening in real time.
The model a retailer builds, or rules it sets around a transaction — whether it’s likely to be a good transaction or invites more scrutiny — should be in play from the moment a consumer begins shopping because buyers behave differently in different channels. For example, what shoppers buy on their mobile device may differ from what they buy from their desktop at home. How they move through the site, what’s in the cart or how they pay may also differ depending on access method. Merchants can make use of all these variables in making risk decisions. Thus, the weight that a retailer places on different attributes might change from one channel to another.
2. Evaluate the tools you’re using. Many retailers rely on inadequate tools to detect and deal with fraud — beginning with identity and address verification. In our recent study, The True Cost of Fraud, we found that merchants rely heavily on two particular tools. One is address verification service (AVS), which is performed by the payment networks. It checks if the billing address you’ve been given matches the billing address on file with the issuer. The other is CVV, which is the three- or four-digit code found on the back of most credit cards. To be sure, these tools do prevent some fraud. In many instances, however, if the fraudster doesn’t have access to the full name and address of the cardholder, it’s not very difficult to find. Furthermore, in most data breaches, the CVV is also compromised.
Fraudsters generally are in possession of everything they need to leapfrog these rudimentary checks, so over-reliance on these two tools can allow a lot of fraud.
3. Add in a layered approach to fraud prevention. If a retailer doesn't know what it should be looking for, it won’t know when it's missed it. Minimizing fraud all ties back to understanding the specific data points that the retailer needs to look for.
The first set of layers for the retailer to be aware of are across-the-board metrics having to do with the transaction — velocity, consistency of address, inconsistencies of shipping locations, high-risk addresses and reputation of email are all useful indicators. From there, a layering of fraud prevention tools, starting with transaction rules and adding in relevant data sources, can make a significant difference.
In Q3, it’s All About Measurement
When taken together, these actions — monitoring, evaluation and layering — can create an environment that fosters transparency, which is the strongest deterrent to perpetuating fraud that we’ve seen. Our advice for retailers is to view their fraud defenses in the same light as keeping the batteries fresh in your fire alarm system. To keep holiday fraud to a minimum, the time to start is now.
Aaron Press is director of payments at LexisNexis Risk Solutions, a data, technology and analytics company.