Industry News

Pui-Wing Tam. “Businesses Get Tougher on Friendly Fraud.” The Wall Street Journal. 26, May 2009.

Businesses Get Tougher on 'Friendly' Fraud

Online merchants are fighting a surge in so-called friendly fraud, as more consumers try to get out of paying for their Internet purchases in the recession.

Online jeweler Ice.com Inc. and travel site Expedia Inc. are among companies seeing at least 50% spikes from October in friendly fraud, a term used to describe when a consumer disputes an online charge but doesn't return the item or has already used the product.

Common scenarios include consumers falsely claiming they never received a product or they received the wrong item. Other consumers deny they ever authorized the charge and refuse to pay for the item.

Since the markets tumbled last year, Ice.com says its rate of suspected friendly fraud has tripled, while Expedia says it's up 50%. Athletic shoemaker K-Swiss Inc. says it's seen suspected friendly fraud rise 10% since January.

These companies say the fraud is sometimes blatant, with some consumers sending back boxes filled with rocks instead of the item that was shipped, and then asking for their money back. But in most cases it's hard to distinguish between fraudsters and consumers who legitimately don't receive their online purchases.

"Many people think [friendly fraud] is an easy way to reduce the amount they owe their credit card company," says Sanjay Sarathy, senior vice president of marketing for Vindicia Inc., a Redwood City, Calif., company that makes software to combat online fraud.

The problem is similar to what happens in retail stores when consumers return clothes or other items for a refund, after having already used the products, a practice known as "wardrobing" or "closeting." Overall, fraudulent returns to retailers totaled $11.8 billion in the U.S. in 2008, up from $10.9 billion in 2007, according to the National Retail Federation.

Companies are stepping up their vigilance against friendly fraudsters by analyzing computer records to identify consumers who charge back items more frequently. At Ice.com, the Champlain, N.Y., company also photographs every online order before packing the item into a box to be shipped, says Ezzie Schaff, vice president of risk management.

Mr. Schaff recently teamed up with police in Fayetteville, Ga., to catch a serial friendly fraudster. That individual bought a $9,000 piece of jewelry from Ice.com, then claimed the wrong item was shipped and sent back a cheap watch in its place. After some police enquiries, the individual returned the jewelry and wasn't arrested, says Fayetteville police detective Marvin Vinson.

While there are no numbers on the costs that friendly fraud incurs, companies say they get penalized twice because they lose both the revenue from a sale and also the item. Tom Sullivan, Expedia's senior director of global payments and risk, says companies also carry extra labor costs associated with their investigation of disputed charges. In addition, he notes, companies that hit over a certain threshold of friendly fraud "chargebacks" are levied higher fees by banks and credit card companies.

In Expedia's case, friendly fraudsters buy non-refundable plane tickets or trips through the site, but claim they never authorized the purchase, sticking the Seattle company with the cost of the tickets, or in some cases the entire trip, after it's been taken.

Photo-equipment supplier Calumet Photographic Inc. says it averages about $130,000 a week in fraudulent orders through its Web site. About 30% of those are friendly fraud, while the rest are traditional frauds with stolen credit cards.

Scott Shulman, K-Swiss's director of e-commerce, says earlier this month, one person claimed he didn't receive his $400 shipment of shoes. Mr. Shulman said he would send somebody to the customer's post office to pick up the card that showed someone had signed for the shipment. The consumer backed off his claim.

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"I-Merchants Tune Into Fraud Prevention Tools."  MultiChannel Merchant.  10 Feb 2009

I-Merchants Tune Into Fraud Prevention Tools

Online merchants lose 1.4% of their revenue to fraud. That’s about $4 billion in annual sales. So what are they doing about it?

Many plan to increase the usage of online fraud detection tools in 2009, according to a survey by electronic payment, risk and security management provider CyberSource.

The company’s 2009 Online Fraud Report polled 400 online merchants in the U.S. and Canada. The study shows respondents’ implementation plans for three online fraud detection tools— device fingerprinting, IP geolocation and order velocity monitoring—have more than doubled, based on the 2008 survey results.

Forty-seven percent of merchants with more than $25 million in online revenue and 25% of all surveyed merchants indicated they were planning to add device fingerprinting. This tool examines and records details about the configuration of the device from which the order is being placed.

Device fingerprinting was rated by 43% of online merchants currently using the devices as being one of their three most effective tools, according to the study.

IP geolocation, a tool that attempts to identify the geographic location of the device from which an online order was placed, will be added by 18% of respondents. It provides an additional piece of information to compare against other order information and order acceptance rules to help assess the fraud risk of an order.

And 15% of all merchants—including 17% of merchants with more than $25 million in online revenue, plan to include order velocity monitoring systems, which help detect suspicious patterns of purchasing.
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Bernard, Patrick.  "Retail Crime Up Thanks to Down Economy."  MultiChannel Merchant.  8 Jan 2009.

Retail Crime Up Thanks to Down Economy

It’s no secret that when the economy tanks, retail crime goes up. Especially when it comes to crimes such as shoplifting, returns fraud and use of stolen credit cards.

This recession is no exception: According to the Retail Industry Leaders Association’s 2008 Current Crime Trends Survey, retail crimes are trending up and will likely continue to increase through the rest of 2009.

Of the 52 major U.S. retailers that participated in the survey, which was released Dec. 1, 84% reported an increase in theft/amateur shoplifting; 76% reported an increase in financial fraud; and 80% reported an increase in organized retail crime. Retailers also reported a sharp uptick in robberies and burglaries in 2008.

“All of the crimes that retailers experience are trending up,” says Paul Jones, vice president asset protection, for RILA. “Taking a shotgun view of this, 2009 looks like it will be a real challenge for retailers: External theft, internal theft, robberies, break-ins, bad checks, stolen credit cards -- all of that type of stuff that hurts the bottom line.”

Jones says “anytime we see an economic decline, those people who abuse the system, who commit crimes, tend to come out in droves. So logic would say that we’re going to see some problems.”

What’s particularly disturbing, he says, is that retail crimes are increasing in areas of the country where they aren’t normally seen in high numbers. The survey shows that opportunistic criminals are moving beyond the urban centers and into a number of rural areas. States reporting a sharp uptick in retail crime include Arizona, Colorado, Iowa, Kansas, Missouri and New Mexico.

One reason retail crime is spreading to these rural areas, Jones says, is that local law enforcement agencies have fewer resources for combating the problem. And now, with the ailing economy, many municipalities are cutting the budgets of their local departments.

Also disturbing is the fact that many of these crimes can be linked to organized retail crime. Organized retail crime, or ORC, involves sophisticated crime rings that steal and stockpile huge quantities of merchandise that is sold later to unwitting buyers. The stolen merchandise is sold through flea markets, swap meets, pawn shops -- and increasingly through Internet auction sites such as eBay.

RILA says retailers lose billions of dollars each year due to ORC schemes. In the 2008 Current Crime Trends Survey, 80% of retailers reported an increase of organized retail crime (the report does not say how these retailers identified crimes as being part of an overall organized crime effort).

“Unlike simple shoplifting or other crimes of opportunity, ORC growth attributed to a slowed economy is less likely to decline as the economy improves,” RILA’s report states. “The criminal enterprises associated with ORC become reliant on the revenue derived from the commission of this crime and thus will likely continue to commit these crimes as the economy improves.”


Spike in retail returns fraud

Another alarming trend is the rise in retail returns fraud, in which criminals fraudulently return goods for profit. For example, there’s receipt fraud. This is when falsified, stolen, or reused receipts are used to return merchandise.

Then there’s price arbitrage. This is when the criminal steals the price tag from a lower-priced item, puts it on a higher-priced but similar looking item, buys it at the lower price and then returns it at the higher price.

Another popular form of retail returns fraud is “wardrobing” or “renting:” This is where a customer buys merchandise for an occasion – a dress for a prom, a video camera for a wedding, a big-screen TV for a Super Bowl game -- with the intent to return it when the event is over.

According to the National Retail Federation's 2008 Returns Fraud Survey, released in November, retailers will see a total of about $219 billion in returns from sales made in 2008 – a 19% increase over the $178 billion in returns recorded in 2007. Of those returns, about $11.8 billion will be fraudulent – an increase of about 8% over last year’s figure of $10.9 billion.

What’s more, retailers will see approximately $47 billion in returns just for the 2008 holiday season – an increase of about 15% over 2007’s figure of $40 billion. Of those holiday returns, about $3.54 billion will be fraudulent.

And with the economy in a tailspin and people more hard-pressed than ever to make ends meet, loss prevention experts say it is only going to get worse.

Fortunately, most retailers are able to react quickly to the increase in these trends and counteract them. For example, in the case of returns fraud, most major retailers now have software that enables them to track returns activity and flag those transactions which appear suspicious.

“A majority of the national or larger retail chains have some system in place to monitor or manage returns transactions,” says Joe LaRocca, vice president of loss prevention for the NRF. “It might be manual on the store end and automated back at headquarters – but most of the retailers I’ve dealt with – and I’ve been in the industry 20-plus years – have always had systems, either third party or proprietary, to help manage their returns.”

The key challenge, he says, is finding ways to combat these types of fraud without any detriment to the customer experience. You have to make it easier for your good customers to make legitimate returns – while at the same time making it difficult for the bad guys to make fraudulent returns, he notes.

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Hansell, Saul.  “EBay Tries to Buy a Little More Love From Sellers.”  The New York Times.  20   June 2008.
 

Ebay Tries to Buy More Love From Sellers

With thousands of eBay’s most active sellers converging on its eBay Live convention in Chicago, the embattled online flea market is trying to give both sellers and buyers a little more to win back their loyalty.
The key problem with eBay is that the value of what it offers has not kept up with the price it charges sellers. Between the fees to list items on eBay — essentially advertising — and the PayPal transaction fees, eBay often charges about 13 percent of each transaction.

Sellers can pay a tad more, about 15 percent, to sell items through Amazon.com’s Marketplace service, where they get a little more protection against fraud and a site that arguably offers a better experience for their buyers. Or they can set up their own Web site and buy advertising and transaction services a la carte — an ever-more-effective option as people increasingly shop through search engines.

Ebay has already cut some fees to try to address sellers’ frustrations.

At the conference, eBay made a series of announcements that get at other issues of value, for both sellers and buyers.
 

For sellers, it is addressing one of the most obnoxious issues: chargebacks. That’s when a buyer tells a credit card company that the goods never arrived or were not as specified. Credit card companies generally side with the buyers in those situations and reverse the payment made to the seller. Ebay said it will absorb those chargebacks in cases when there was fraud — such as a credit card used without authorization — or if a shipment was not received, even on many international shipments. Until now, sellers were protected against chargebacks only in the United States, Canada, and the United Kingdom, and they were limited to $5,000 a year in chargeback protection.
For consumers, eBay is also promising to refund the money to any buyer who doesn’t receive the item purchased as described. The new protections for both buyers and sellers only apply if the purchase is made using PayPal. The previous version of eBay’s buyer protection plan offered coverage of up to $200 for most items and up to $2,000 for items purchased from eBay’s most established merchants. The company says it has enough experience with fraud control systems to make the cost of these changes manageable.
 

These days, many consumers associate eBay with fraud and schemes as much as they did with unique items and bargains a few years ago. So I suspect the ability to advertise a no-strings-attached guarantee may be very helpful.
 

In another move that could make both buyers and sellers happier, the company said it would cut fees for any PowerSeller — the most active sellers — with a customer feedback rating of 4.9 on a 5 point scale. Right now that amounts to 16 percent of all PowerSellers, and it offers an incentive for more of them to improve their customer service. (It also should help reduce shipping fees, which are among the biggest consumer complaints about shopping on eBay.)
 

Ebay is continuing to move away from its tradition of offering a level playing field for both big and small sellers. It said it is open to negotiating fees with companies that sell more than $500,000 a month on its site and who have excellent feedback scores from customers. Smaller sellers not surprisingly complained.
 

Are these price cuts for the top sellers and improved benefits for all enough to get eBay’s groove back? They do start to address some of the benefits that Amazon has offered. But there are signs that eBay isn’t done trying to improve the perceived value of its site. Ina Steiner, editor of AuctionBytes, reports that eBay is sending signals that it will cut fees for all sellers before the big holiday selling season this year. Stephanie Tilenius, the manager of ebay’s North American marketplace, told Ms. Steiner, “We want to be the most price competitive marketplace on the Web.”