Part 3:
Fraud in the New Ecommerce Era

Phishing & Triangulation Fraud Are Increasing

When consumers had no choice but to buy online, they became more susceptible to seemingly innocent opportunities to get information (sign up here to get the vaccine, find out if you’re eligible for financial relief, etc.). Fraudsters used these emails to collect information that consumers would normally never give out.

Often, those “opportunity” sites require a username and password, and most people use the same passwords for everything.

Fraudsters then take the swath of usernames and passwords to log on to major online retailer sites and take over the accounts. And if the consumer stored their credit card information on the site, a fraudster could just make a purchase and be done.

Triangulation fraud also made its way back into practice with the pandemic.

Here’s how it works:

1. Fraudsters create a fake website that sells legitimate products at a much lower cost than can be purchased elsewhere.
2. An unknowing consumer enters their credit card information to make a purchase.
3. The fraudster then uses a different (but stolen) credit card to buy the product from the legitimate retailer.
4. The fraudster ships the product to the consumer (who’s now unwittingly complicit to fraud), pockets the payment and uses that same consumer’s credit card for their next triangulation scheme.

Fraud Happens Across All Retail Channels

Despite a common fear among customers of online shopping being more dangerous, fraud happens almost as often in brick-and-mortar stores as it happens online.

Fraudsters Don’t Discriminate Online From In-Store

Fortunately, many consumers take their own steps to protect themselves from fraud and stay secure — from verifying the validity of the ecommerce sites where they shop to being extra-careful about where they share their data.

Customers Try to Protect Themselves From Fraud

“In some Latin American countries, consumers expect layers of security because that’s the norm. They have to provide quite a bit of information to make a purchase online. But it’s the opposite when you’re selling to consumers in the United States, the United Kinkdon and Europe. They expect to make purchases with a swipe on their phones. You need different fraud and payment strategies, depending on the country you’re selling into.”

Bernardo D’Elia, Under Armour, Ecommerce Operations, Payment Methods and Customer Service Manager for Latin America

Novice Online Customers Are Often Mistaken as Fraudsters

Many ecommerce businesses rely on consumer buying patterns and behaviors to help spot fraudsters. However, brand-new customers may not follow the same patterns and behaviors as longtime ecommerce shoppers, putting them at risk for being mistakenly flagged as fraudsters.

• New customers may start out with repeated, small purchases until they get used to ecommerce. This mimics how fraudsters will often “try out” a stolen card number with small purchases before going for a big-ticket item.
• New customers who just want to buy a specific item may use the search function to navigate straight for that item, put it in the cart and head to check out right away — which can look very suspicious if the customer has no previous order history.
• As we saw in our section on trends, novice customers are also more likely to purchase electronics online. A new customer who veers straight for the electronics section and makes a big-ticket purchase has a higher risk of being flagged.
• New customers aren’t always accustomed to delivery times. That means they are more likely to request urgent delivery out of sheer impatience— whereas fraudsters request urgent delivery to reduce the odds of being caught before they receive their goods.
• A new customer who experiences a false decline will likely try to make the purchase again right away — and perhaps repeatedly — because surely there must’ve been a mistake. This “recurring” purchase pattern can appear to be fraudulent.

Another group that may be mistaken for fraudsters? Shoppers from different countries. Customers who are cross-border shopping may struggle with the finer points of your ecommerce site’s language, resulting in honest mistakes. Merchants need to remember that some of their brand-new customers aren’t inexperienced; rather, they just may be shopping for the first time overseas.

“Keep in mind that consumers in other countries or cultures may have language barriers and less access to credit. Merchants should view cross-border consumers similarly to novice consumers. What will make their online experience easier and better?”

Rafael Lourenco, ClearSale Executive Vice President & Partner

No matter the reason, legitimate customers who are mistaken as fraudsters are far from happy about it.

Consumers Are Even Less Forgiving of False Declines

In our last survey, we reported that consumers experience serious irritation when faced with false declines and aren’t shy in taking their complaints to social media after just one declined purchase.

Consumers Aren't Shy in Complaining to Social Media After Just One Declined Purchases

This hasn’t changed a whole lot. In fact, it’s grown.

Across the board, consumers do not respond well to being declined in error: 40% of respondents would likely never place an order with that same merchant again, while 34% would likely post a negative comment on social media about their experience.

The good news: 60% would at least consider reaching out to customer service to try again. However, 21% would not. That’s a substantial amount of business to potentially lose — forever — over a mistake.

“It’s insulting, it’s a hassle and it slows consumers down. Think about a mom with three young kids who has little to no time for herself, let alone the time to figure out why her purchase has been declined. She’s not going to ask her credit card company; she’s going to complain to her friends.”

Brooke Carrie, ClearSale Director of Customer Success

And when it comes to younger generations, the stakes get even higher. These consumers know how online shopping works and expect to be approved. When looking at consumers under the age of 40, the percentage of them that would swear off a store over a false decline jumps to 45%.

And the percentage who would complain on social media? It rises to 33%.

Millennials and Gen Z are more likely to boycott a store that falsely declines them because they probably know of 10 other places to find the same item. And their tendency to voice their unhappiness on social media is a natural next step because it’s easy: They’re already on social media all the time. A purchase attempt from an Instagram store that’s denied is just begging for a negative comment.

For novice customers and older generations, however, false declines are confusing and may feed into their fears about identity theft. They may think they’ve done something wrong or even question whether their credit is good enough.

Retailers are in a pickle. Customers don’t like false declines, but they also don’t like being asked for more information to verify their purchases. This presents a real problem for merchants who are trying to fight fraud. It also presents a real problem for retailers who are trying to optimize their customer experience.

“As consumers shop online more, they have less tolerance for being rejected. Where experienced consumers expect to be approved, novice customers see false declines as a personal insult. Either way, auto-declining flagged orders means lost customers — to the tune of $118 billion in yearly revenue. To succeed in 2022, ecommerce merchants need to do everything possible to approve orders — safely.”

Rafael Lourenco, ClearSale Executive Vice President & Partner

What Ecommerce Businesses Can Do

The flood of new shoppers was a dream come true for many ecommerce businesses. However, it was also a dream come true for fraudsters.

This has put online retailers in a tight spot: How do they fight fraud effectively without scaring away new customers — or angering longtime customers?

Understand the True Cost of Fraud

Before doing anything else, it’s vital for companies to understand their complete fraud picture.

• They need to know their cost of lost merchandise, including shipping and fulfilment.
• They need to know how much they’re currently spending on fraud protection, including time and money spent and lost when staff are inevitably pulled from every department to help review transactions.
• They need to know how much they’re losing to chargebacks that occur due to fraud.
• And they need to know whether they’re declining good orders — and the lifetime potential value of those lost customers.

Avoid Auto-Declines or Deny Lists

Personalization isn’t only for the shopping experience — it’s also important for your fraud prevention strategy to take each customer’s individual situation into account.

Unfortunately, many ecommerce businesses (of all sizes) use broad-brush rules as a “set it and forget it” approach to fraud:

• A legitimate customer may live in the same apartment building as a known fraudster. If that customer’s address triggers a red flag, they may be declined.
• A brand-new customer, while holiday shopping, might go to an electronics ecommerce site for the first time and attempt to buy thousands of dollars’ worth of phones and gaming items. Depending on how the store’s fraud screening is set up, that customer could be declined — and go elsewhere.
• A longtime customer, while on vacation in Mexico, remembers she needs to send her sister a birthday gift, so she heads online. The store’s fraud screening may decline her because her geolocation is nowhere near her known billing address.

Consider Supplementing With Manual Fraud Review

Depending on their transaction volume, some ecommerce businesses could rely entirely on manual fraud review. However, many businesses quickly find that kind of process unsustainable and difficult to scale, particularly when seasonal fluctuations take place and staff is spread thin.

At ClearSale, we use machine learning and artificial intelligence (AI) to provide initial screening for our clients’ transactions. The AI quickly approves obviously legitimate transactions and flags the others for manual review by our expert fraud analysts who quickly — but thoroughly — put together the rest of the puzzle to determine if the transaction is legitimate or not.

Adopting a similar approach can deliver great fraud protection at scale, without the worry of legitimate customers being caught up in the net. ClearSale is an extension of fraud teams, not a replacement. We augment teams with the support necessary for a positive customer experience.

The result: Happy customers and more revenue.

Increase Your Fraud Protection Knowledge Base

Fraud has grown both in scope and sophistication, which means fraud prevention and protection teams must keep pace.

That can be difficult to accomplish with a solely in-house team, either due to the challenges of scaling (a major issue for most ecommerce retailers during peak seasons) or because specific areas of expertise may be difficult to hire for.

And while some may look to solve this issue by outsourcing their fraud protection altogether, it’s not always a viable option. As such, many ecommerce businesses are instead partnering with fraud protection companies, using their capacity and specialized skills to enhance and augment their own fraud protection team.

For example, an ecommerce store could bring in ClearSale to review only certain types of transactions, such as declines from their fraud filters. And in the meantime, the store’s entire fraud team benefits from having access to ClearSale’s expert detection of emerging threats and trends.

“When you bring in an experienced fraud prevention partner to strengthen your fraud protection team, not only does it free up internal resources to be more strategically allocated, it gives internal fraud teams a real intelligence boost. The partner will have a wealth of data and analytics into global fraud patterns and trends, giving your team a much more complete fraud picture and your company much better approval rates.”

David Fletcher, ClearSale Senior Vice President

However, the principle of caveat emptor applies here. Going with a bargain can backfire, as one of our own clients discovered. They had tried out a lower-cost option but saved only 10% in vendor costs … while their decline rate leapt from 0.90% to 3.30%.

After just five months, they came back to ClearSale — where their decline rate dropped by 80% and their sales increased by 3%.

In short, it’s vital for ecommerce businesses to make sure their fraud protection increases their approval rate to the highest level possible without exposing them to increased fraud.