Consumer Electronics & Fraud
Fraud Risk in the
Consumer Electronics Industry
As ecommerce grows around the world, so does the prevalence of ecommerce fraud.
Fraudsters have gotten quite creative with their schemes and tactics, making it difficult to anticipate what to expect.
During the pandemic, fraud was rampant. Fraudsters seized on the opportunities that come from inexperienced consumers and overwhelmed retailers, and they crafted new tactics and schemes. In fact, the Federal Trade Commission received 436,000 fraud reports from consumers between January 2020 and April 2021, equaling $399 million in losses.
Consumer electronics is a hotbed for fraud because transaction values tend to be high, as well as for these other reasons:
- Constant demand for the latest tech products. Fraudsters know they can quickly find buyers.
- Electronic devices tend to be small and easy to ship and store (think smartphones, tablets, laptops and wearables). The carrying cost is relatively low for fraudsters.
- Consumer electronics can usually be resold at a price close to the purchase price. That means more money for the fraudster.
In addition to the novice customers who’ve entered the ecommerce industry in the past few years, this industry attracts plenty of first-time buyers, making it difficult for fraud filters to determine the validity of a sizeable number of transactions — ultimately weakening the filter’s ability to predict fraud patterns.
Most Common Types of Fraud
The rise in fraud is forcing in-house teams to continuously gather and analyze data so they can identify anomalies. They also need to know the latest industry fraud trends, which change rapidly. Across the ecommerce landscape, there are types of fraud that impact every business — specifically, card-not-present and account takeover fraud.
Card-not-present fraud
Card-not-present (CNP) fraud is especially prevalent. CNP fraud happens when someone uses another person’s payment card information online without authorization. During the first year of the pandemic, 115 million stolen debit and credit cards were posted for sale on the dark web in 2020— over 75% of them were from U.S. consumers. Those cards and card data are sold to fraudsters who use them to attack retail businesses.
Account takeover fraud
Similarly to CNP fraud, account takeover (ATO) fraud happens when a criminal uses stolen credentials to take over accounts and make purchases. Almost 60% of businesses have experienced an increase in ATO fraud since 2021.
What you might not expect is the form these types of fraud can take. Fraudsters are smart and can be quite advanced when it comes to their methods and tactics. Here are some of the more sophisticated attacks businesses may encounter.
Additional Types of Ecommerce Fraud
Fraudsters are smart and can be quite advanced when it comes to their methods and tactics. Here are some of the more sophisticated attacks merchants may encounter:
Holiday Attacks
Fraudsters know many electronics retailers won’t be prepared to handle big spikes in sales volumes during the holiday shopping season, particularly on Black Friday and Cyber Monday. They use this opportunity to step up their testing of businesses, and once they find a weakness in the company’s armor, they attack with full force.
Triangulation Schemes
With a triangulation scheme, the fraudster purchases stolen credit card information on the black market and lists a popular electronics item (like a laptop or mobile phone) for sale on an online marketplace. When an unsuspecting consumer pays the fraudster for the item, the fraudster uses the stolen card information to purchase the item from a retailer and ship it to the consumer. The fraudster then pockets the money.
Counterfeit Barcodes
Fraudsters go to retail stores, find high-priced items, and place fake barcodes on top of actual barcodes to artificially lower the product cost. The fraudster purchases the item at a reduced cost and then resells it online for at or near the actual price.
Shipping Scams
The fraudster places an order and initially sets the delivery address to match the billing address. Once the order is approved, the fraudster contacts the merchant and changes delivery address. Alternatively, if the fraudster is located in a high-risk area, they might use the delivery address for a freight forwarder. This can mask the true destination of the package and prevent the merchant’s fraud filters from flagging the order as suspicious due to geographically based risk.
Cryptocurrency risk
- Transactions are irreversible. There are no chargebacks with cryptocurrency.
- Transaction fees are negligible.
- Transactions resolve quickly.
The Cost of Fraud in the Consumer Electronics Industry
Consumer electronics brands are, in many ways, similar to luxury brands. Customers adopt their favorite electronics makers as status symbols or crucial elements of their lifestyle. Customer loyalty matters a great deal to electronics brands.
However, fraud can unsettle customers; disrupt the image of a brand; and drive them to try alternatives, especially when they’re considering spending hundreds of dollars on high-end devices.
Chargeback Fees
Another (more quantifiable) way electronics retailers pay for fraud is through chargebacks. A chargeback occurs when a cardholder notices a transaction they don’t recognize on their statement. The cardholder will dispute the charge with their credit card issuer.
The card issuer will investigate the charge. If they determine the claim is legitimate, the card issuer will refund the payment. The company will be debited for the refund plus an additional fee (called a chargeback fee).
Chargeback fees can range from $15 to $100 or more per transaction, often exceeding the cost of the product itself. If a card issuer decides a company is incurring too many chargeback fees, it may increase the fees or remove that company’s ability to accept credit card payments altogether.
False Declines
While fraud is a problematic issue for online retailers, changing consumer attitudes make it equally, if not more, important for companies to be wary of “overcorrecting” the problem. False declines can be just as costly — if not more so — as fraud.
Every online transaction must pass through several gateways on the way to approval. At each step, filters are configured to spot the indicators of fraud. Sometimes, these filters will “catch” and block an entirely legitimate transaction. When this happens, it's called a false decline or a false positive.
False declines are nearly always the result of automated fraud prevention software.
Fraud filters are driven by powerful algorithms that calculate the risk of fraud based on hundreds of factors, starting with the basics, such as location, delivery address and shipping speed. These algorithms can be extremely effective at stopping fraud, but they can also sweep up legitimate transactions in the process.
It may be helpful to think about false declines from the point of view of a customer.
Consumer electronics purchases are often the culmination of extended periods of making product comparisons, reading reviews, and saving up. Now, imagine, after all that, being blocked from buying. It can be extremely frustrating — enough to turn you off a brand forever.
False declines are particularly damaging for the consumer electronics industry. Unlike with apparel or niche sectors, it's very easy to find the exact same product (sometimes for the very same price) via other businesses. If a customer’s order is declined, odds are good they’ll go to a competing business. There are very few second chances in this hotly competitive market.
Additionally, in the era of social media, a single dissatisfied customer can take others with them. Negative reviews can hurt your brand’s reputation. Studies have shown that consumers tend to perceive negative ratings and feedback as more credible than positive information.
When you consider that that over half of declined transactions are valid, the potential of risking a valid customer for the sake of fighting fraud is high and so is the cost.
Every $1 in false declines translates to a $13 loss. Even worse, you’re not just missing out on one transaction — you’re losing the lifetime value of that customer.
Learn how to protect your business from false declines and chargebacks in our free webinar for small and midsized merchants.
