Fraud Risk in
Luxury Goods Ecommerce

Ecommerce Fraud Is Increasing

Ecommerce fraud was already a significant problem for  ecommerce businesses before the pandemic.

But once scores of brand-new shoppers started dipping their toes — and their credit card numbers — online, fraudsters smelled blood in the water and ramped up their attacks using every tool they had. 

Ecommerce businesses found themselves with the increased expense of replacing lost goods, part of the reason why, according to a 2021 LexisNexis study, every $1 of fraud now costs U.S. retail and ecommerce merchants $3.60 ... a 15% increase over the $3.13 cost from 2019's study.

 

Ecommerce Fraud Stats

• Credit card fraud accounts for  92% of fraudulent online transactions
• By 2030, global card fraud losses are expected to reach  $49.32 billion — or 6.23 cents per $100.
• In the U.S., that cost is expected to be 8.97 cents per $100. 
• 22% of merchants  experienced attempted fraud which exceeded 0.51% of their revenue
• From Q2 2019 to Q2 2020,  ATO fraud attempts increased by 282%
• In 2020, BOPIS (buy online pickup in store) and curbside pickup fraud  increased by 55%
• Ecommerce businesses that use best practice, multilayered solutions experience a  71% lower volume of successful fraud attacks and a 12% lower cost of fraud.

Despite embracing online shopping, consumers know there is risk ... and they expect businesses to take steps to protect them. In our own research, 84% of consumers would likely boycott an ecommerce site that allowed a fraudster to place an order with their stolen card number.

Luxury ecommerce customers expect a flawless customer experience. In 2022 and beyond, that experience must include robust — but seamless — protection against fraud.

That means luxury ecommerce retailers need to know what to look for when it comes to fraud so they can deliver on customer expectations.

 

What Fraud Looks Like in the Fashion & Luxury Goods Industry

Fashion and luxury goods are widely considered a high risk industry when it comes to fraud.

Fraudsters know they can easily resell luxury goods because of their popularity. Discount deals attract bargain hunters – even when they have to get that deal from a questionable site. And accessories such as jewelry, leather goods, and handbags are small enough to easily package and ship.

When a retailer is processing thousands or transactions each month, they can see patterns and identify potential fraudsters.

But luxury ecommerce businesses process fewer transactions, so the opportunity to identify and screen for fraudulent behavior is much trickier. That’s why a single fraudulent transaction in the luxury goods industry can have such a significant impact.

At the same time, luxury ecommerce retailers have an equally limited number of opportunities for customer satisfaction. They can’t be overzealous in denying transactions or they will lose customers.

“Luxury ecommerce businesses walk a very tricky tightrope,” says Rafael Lourenco, Executive Vice President and Partner at ClearSale.

“Due to the high value and low frequency of transactions, you can’t make a mistake! One chargeback can represent a significant loss…and start worrying your processing provider. So, you want to make sure you’re using the best technology available to avoid those losses.”

“On the other hand,” adds Rafael, “You can’t make the opposite mistake, either. Declines caused by false positives can be dramatically damaging in this market. That’s why it’s so important to turn fraud prevention into a positive customer experience. Customers feel cared for and your business is protected.”

So, what should luxury goods ecommerce merchants look for when trying to detect fraud?

 

Triangulation Schemes

Triangulation schemes involve fraudsters setting up fake storefronts or third-party marketplaces where legitimate customers make purchases. The fraudster uses stolen payment information from the dark web to pay for the transaction with a legitimate ecommerce retailer and fills the order for the legitimate customer.

The result is three-fold. The legitimate customer is unknowingly in possession of stolen goods and may positively review the fraudster’s marketplace, increasing its ability to perpetrate fraud. The legitimate retailer will likely be hit with a chargeback, and the fraud victim – the cardholder – will have no trail to identify how the fraud took place.

 

Shipping Scams

Shipping scams can run a gamut of possibilities including:

• Delivery to non-street addresses, such as P.O. boxes
• Package rerouting after orders are placed, which can bypass any conflict between billing and shipping address
• Disparate billing and shipping addresses, which isn’t always a sign of fraud but should be considered as a possibility. Just remember that address information entered on mobile devices is prone to errors due to small keyboards.

Another shipping-related fraud can take place with international addresses. This is where it gets tricky for global luxury brands.

So many of the biggest markets for these products are international. At the same time, international orders from specific countries have a great possibility of fraud. Luxury ecommerce retailers should stay up-to-speed on the fraud trends in countries where they do business.

 

 

Gift Card Scams

Fraudsters know that denying a gift card can be the kiss of death for an online merchant, so they are almost always honored, even if there is suspicion of fraud. That makes gift card fraud particularly attractive.

Virtual gift cards – which have become much more common after 2020 – are easier to scam than physical gift cards, and they are growing in popularity due to convenient delivery, the flexibility of gift amounts, high level of personalization, and the fact that they allow several people to contribute to a single e-gift card.

The most common scheme is using stolen credit card data to buy electronic gift cards and reselling them for cash. Fraudsters also use account takeover (ATO) fraud schemes to steal login credentials, take over a consumer’s account, update contact information, and purchase gift cards with little scrutiny.

Fraudsters also use bots to hack gift cards by testing millions of combinations of codes to find activation codes. From there, the activated cards can be used or sold on the dark web.

 

Return Abuse

With everybody shopping at home, “try-before-you-buy” services are seeing new demand – and new potential for fraud. Merchants are likely to see an increase in return fraud, with customers wearing the products out and about, sometimes repeatedly (instead of simply trying them on) and then sending them back. This is different from typical card-not-present fraud, in that the cardholder is legitimate – it’s their behavior that’s not.

Return abuse is one of many forms of “friendly fraud,” where a customer uses their own card to buy products, but then defrauds the merchant in another way (falsely reporting items as “undelivered” is also a common form of this type of fraud). Merchants can fight this type of fraud in a few different ways:

1. By refining their return policies based on their current and historical fraud patterns
2. By scoring transactions with a “returns fraud score,” which incorporates different data points such as user's return percentage versus market standards, seasonal items being targeted by fraudsters, and other factors that indicate a high risk of returns fraud.
3. Manual review of high-risk orders, when the analyst can check soft aspects of these transactions such as the buyer's social media behavior (you may be surprised by how many fraudsters brag on social media about their ill-gotten goods). While the manual review does take time and manpower, it can be worthwhile for high-value/high-margin items.

“When talking about returns fraud we also need to talk about promotion abuse,” says Sarah Elizabeth.

“A holistic approach is necessary to identify patterns such as a high number of uses per voucher, the number of coupon uses within a set network distance, and other patterns that indicate promotion abuse. Similar to the returns fraud prevention strategy, the prevention of promotion abuse requires a combination of adjustments on the merchant policies, transactional scoring, manual review of high-risk transactions and account creation analysis.”

 

Other Schemes and Scams

Social ecommerce fraud: Fraudsters often turn to Facebook and Instagram to resell stolen goods purchased fraudulently.

Holiday attacks: Holiday time is popular for fraudsters because of the increased number of transactions. While luxury goods do sell in higher volumes around the holidays, the total volume is still not as high as some of the lower-priced items, so luxury merchants may or may not see an increase during this time.