Fraud Forecast 2020: Merchants, Banks, and Consumers All Have a Part to Play

2020 is here; we’re now into the third decade of the Twenty-First Century. That makes this the perfect opportunity to reflect on just how much the digital marketplace has changed over the last several years.

In 2000, US eCommerce spend totaled just $27.6 billion. Contrast that to online US consumer spend in 2020, which is projected to read $604 billion. We’re talking about a near 22-fold increase in 20 years!

eCommerce is no longer just a curious, novel concept, as many of us thought about it two decades ago. The online market has grown into a major shopping channel. With that transformation, though, comes the need for a degree of stability. The eCommerce space can’t be as volatile and disruption-prone as it may have been in the past.

That said, there are still plenty more changes coming; some will be good, others bad. Take fraud, for instance, which continues to be a thorn in the side of online retailers.

Fast-Growing Online Fraud

Online retail accounted for just 10% of total consumer spend in 2019. That said, online channels represented 45% of total growth, with most new activity coming through mobile channels. Unfortunately, growth in online channels presents a massive opportunity for bad actors; According to a study by Javelin Research, online merchants are 81% more likely to suffer a fraud attack than a card-present seller.

Part of the problem is that there are so many different potential attack vectors compared to brick-and-mortar retail. With physical retail involving a register and a store associate at checkout, there are a limited number of ways to engage in payment card fraud. A fraudster can try to use a counterfeit card, or a stolen card, but there’s not much opportunity beyond that. Online, however, we find myriad tactics one can employ to separate merchants from their money, including:

• Account Takeover: A form of identity theft in which a fraudster accesses a trusted user’s online account, then poses as the legitimate user to complete transactions.
• Clean Fraud: This occurs when a fraudster steals a user’s payment information, then uses it to purchase goods. Clean fraud is the kind of straightforward identity theft most of us are familiar with.
• Friendly Fraud: This is a kind of chargeback abuse; a seemingly-legitimate buyer completes a purchase, only to later file a chargeback and recover the funds without justification.
• Ad Fraud: The fraudster, posing as a legitimate marketer, manipulates clicks or conversion data to gain unearned commissions from an advertiser.

Those are just a few of the most common practices. Scammers come up with new strategies every day to swindle cardholders, merchants, and financial institutions.

One good way of determining each tactic’s impact is by chargeback source. Online merchants self-reported their three primary loss sources as payment card fraud (48%), friendly fraud (28%), and account takeover (7%). More worrisome than the fraud itself, though, was the fact that 12% said “I don’t know.” That’s a problem, because without identifying the source of abuse…one can’t fix it.

Losses in the Hundreds of Billions

Online fraud is a problem that’s going to get worse before it gets better. Year after year, we see total fraud losses consistently trend upward in the online environment.

According to the Nilson Report, global payment card fraud losses will reach $34.66 billion by 2022. Of course, that’s just the numbers we can see; many billions more in losses already go unidentified, or are sacrificed unnecessarily. Looking just at false positives, for instance, we know that retailers decline roughly $118 billion every year in transactions from legitimate cardholders because of suspected fraud.

So, everyone knows we have a problem. That said, no one really has much to offer when it comes to identifying solutions.

I don’t want to make it sound like it’s all gloom-and-doom. After all, adoption of mobile wallets, which offer superior security compared to standard card-not-present transactions, is on the rise. Millennials and Gen-Z are spearheading the trend; six in ten of them report using a mobile wallet, and about half of those individuals use it regularly. The same report shows the number of consumers who self-identified as a victim of card fraud declined by nearly one-third in 2018.

That’s all good news. However, the total number of reported fraud victims remains high, with nearly one in ten consumers saying they’ve experienced card fraud in the last 12 months.

 What Can We Do About Fraud?

That “fast-and-loose” approach to eCommerce might have been forgivable in the early days of the internet. However, we must address this problem if we ever hope to see stability and consistency in eCommerce.

Although merchants suffer most from chargeback losses, paying $19 billion back in 2017, issuing banks lose too, with chargebacks costing institutions nearly $12 billion in that same period. This ultimately hurts consumers, who end up with higher banking fees and higher costs for goods. So, here’s the bottom line: everyone ends up paying the price for fraud. That’s why the key lies in collaboration between vested parties.

We have the power to fix this, but it’s going to take a coordinated effort. The first step is getting retailers, consumers, and banks on the same page.

Consumers

With easy access to chargebacks and zero-liability credit, cardholders grew complacent. While they’re concerned about fraud, they fail to engage in best practices to prevent it. Banks enabled them, creating a kind of feedback loop. Thus, retraining cardholder behavior will be an important part of mitigating fraud.

In addition to standard best practices to prevent one’s sensitive information from falling into the wrong hands, cardholders should be proactive and keep up-to-date on new and developing threats.

Merchants

Online retailers can’t afford to accept fraud as a “cost of doing business.” The only truly effective solution from the merchant standpoint is to embrace a multilayer strategy that implements complimentary tools and practices. For instance, a good multilayer strategy should employ:

• Frontend Tools: CVV verification, two-factor authentication, biometrics (if available)
• Backend Tools: geolocation, Address Verification Service, fraud scoring, velocity checks
• Post-Transaction Support: manual reviews, chargeback mitigation, VMPI integration

Merchants must also adopt business best practices to offer effective customer service. This includes taking advantage of tools like chatbots to streamline service, while also making live support available around the clock. In some cases, very simple missteps on the merchant’s part can cause unintended chargebacks.

Financial Institutions

One might assume the banks have a minimal role to play in this process, but they’re actually integral to mitigating fraud losses. For instance, banks can help on the customer-facing side by providing educational resources, thereby empowering consumers to protect themselves against phishing and other scams. Banks can also exercise greater due diligence in reviewing dispute cases, which will also help retrain consumer behavior, and prevent people from viewing chargebacks as just a bank refund.

As we mentioned earlier, banks suffer more than one-third of all dispute losses, due to lost overhead and other liabilities. It’s in their direct interest to work with merchants and card schemes to fight this problem.

Dynamic Problems Call for Dynamic Solutions

If there’s one key takeaway here, it’s that online fraud isn’t a static or monolithic problem. It is very dynamic, and changes with the development of the market itself. The only way to manage these threats effectively is with a cooperative and multilayer approach. 

eCommerce will obviously continue to be a vitally-important channel in the global market in 2020 and beyond. Even as the threat posed by fraud grows, eCommerce will keep growing. That said, if we don’t take action now to address abuse, it will quickly spiral further out of control, eating up many billions more in sales revenue down the road.