Will Online Fraud Dim the Luxury Retail Industry’s Outlook?

Fraud attempts are challenging for all retailers, but especially so for luxury merchants which operate in a highly competitive market with unique challenges. Brands such as Balenciaga, Burberry, Hermès, Gucci, and Louis Vuitton rely on exclusivity and a delicate balance of supply and demand to drive business and customer loyalty. But this high-end merchandise, which sells for top dollar, attracts customers and fraudsters alike.

Historically, reducing fraud in the luxury market meant going after counterfeiters who knock-off designs and shoplifters who spirit goods out of stores. However, as consumers pivoted to online shopping, digital fraud has become a significant problem. A full 22 percent of all luxury items are now sold online. With global luxury retail sales set to grow 5 percent to $320 billion this year, that means billions of dollars are also at stake.

Fraudsters Are Drawn to the Luxury Price Tags and Policies

Unsurprisingly, fraud attempts are growing in lockstep with sales. In addition to card testing, account takeovers, and malicious refunds, fraudsters are also testing retailers’ policies. Policy abuse can include false “items not received” claims or even bulk purchases of limited-stock items with the intent to resell them.

Recently, Forter analyzed key trends impacting the luxury fraud market. It found that fraud attempts increased by 13 percent year-over-year, and the value of orders declined due to policy abuse increased 151 percent in the same time period.

Balancing Fraud Reduction With Protecting Customer Relationships

In an attempt to thwart fraud, some retailers mistakenly create overly rigid policies that inadvertently deny legitimate customers, including:

• Digital nomads: Think remote workers, social media influencers or traveling retirees — these consumers often have complex digital footprints that can signal fraud with traditional detection tools.
• New customers: A first-time shopper doesn’t have the purchase history that other more established customers will. New buyers with a limited credit history and online footprint are five times to seven times more likely to be declined than other consumers. Unfortunately, once declined, 40 percent won’t return to attempt another purchase. The loss in customer lifetime value is significant.
• Big spenders: Some merchants create policies that deny transactions over a specified threshold. For luxury retailers, this can be especially damaging given their high-end and high-dollar merchandise.

These policies not only cost brands the initial sale, but they also risk losing out on customer lifetime value which, for a luxury merchant, can be worth hundreds of thousands of dollars. Unfortunately, merchants can lose up to 75x more revenue to false declines than they do to fraud.

Fear of fraud can leave well-intentioned brands in a bind. Instead of defaulting to outdated fraud detection tactics that often result in legitimate transactions being blocked, luxury merchants need real-time, accurate decisions to assess trustworthiness — whether a world traveler, a first-time buyer or a major spender, every customer can get the priceless encounter they deserve.

Yohanna Andom is a senior product marketer at Forter, a company that offers unmatched fraud prevention and protection for digital commerce with real-time decisions for every customer interaction.