How technology can provide solutions for rising retail fraud Alice Bonasio is a Writer, Academic and Strategic Consultant specialising in Technology and the Creative Industries Digital technology has brought a relentless wave of innovation, making it easier for customers all over the world to purchase what they want with a variety of payment methods – from credit cards to mobile wallets and even cryptocurrencies such as Bitcoin. While these innovations bring welcome convenience for the consumer and broaden the market for retailers, they have also driven sharp increases in the volume of fraudulent transactions merchants and issuers are subject to. As more consumers opt to do their shopping online, accurately tracking purchases, verifying identity, and matching transaction data to customer information has become a great challenge. This is especially true for companies that do not have robust procedures in place for collecting and cross-referencing such data. According to a recent CNBC article, retailers list fraudulent returns as a top concern, especially around the holiday season. Retail fraud is a growing issue for merchants, who are increasingly looking for solutions that will help them deal effectively with the problem in the long-term. Loss Prevention Magazine estimates that return fraud has proved a significant drain for retailer profits this past holiday season. Of the $9 billion in losses attributable to return fraud last year, $2 billion took place during the holiday season, with more than 5 percent of holiday returns in 2017 expected to be fraudulent. Due to the lack of visibility and direct customer engagement in online transactions, retailers are challenged to verify a shopper’s identity. Furthermore, there is often a lag between the time an order is placed and when that transaction is confirmed, opening the door for more errors or fraudulent activity. “The larger volume of sales in the November and December months, especially around peak dates such as Black Friday and Cyber Monday, is invariably followed by a spike in cardholder disputes and chargebacks,” says Matthew Katz, CEO of Verifi, a leading global provider of end-to-end payment and risk management and card not present fraud and chargeback solutions. “For retailers,” Katz explains, “these chargebacks mean not only incurring fees from card networks and acquirers, but also losing holiday stock, absorbing additional shipping costs, and losing customer trust and future sales. “As consumers analyze the debt they’ve incurred during the holiday period, billing confusion and so-called ‘friendly fraud’ – where customers experience buyer’s remorse and dispute a legitimate transaction by going directly to the card issuer to obtain a refund – become an increasingly costly problem for both merchants and issuers,” he adds. This issue continues to get worse. According to a 2017 report by Appriss Retail, total merchandise returns accounted for more than $351 billion in lost sales for US retailers. To put that revenue in some perspective, the number comes close to the estimated 2017 federal budget deficit of $400 billion. Retail fraud and abuse accounted for a substantial share of these transactions – $17.6 to $22.8 billion in the United States. This brings inevitable, and undesirable, consequences to consumers and the economy in general, as retailers are ultimately forced to offset losses by raising prices or reducing costs. This can in turn cause economic slowdown or stagnation, and ultimately lead to job losses. Last year alone, per the Appriss Retail report, return fraud cost US retailers and workers between 596,000 and 775,000 jobs. Additionally, these fraudulent activities also have a significant negative impact in government tax revenues, with retail revenue losses costing states a total of $1.1 billion to $1.4 billion in lost sales taxes. Atlanta-based data analytics provider, LexisNexis Risk Solutions, recently surveyed over 650 risk and fraud executives from retail organizations. Their findings indicated that the level of fraud as a percentage of retailers’ revenue rose from 1.47 to 1.58 percent in the last year alone. It is little wonder that retailers recognize this problem as one they need to address with dedicated resources and a consistent integrated strategy. The LexisNexis study found that, although many retailers were investing in fraud monitoring, the results weren’t always effective. Companies found it difficult to strike a balance between being protective and turning away genuine customers and transactions. Retailers are keen to strike a balance between these two priorities, and to find solutions that tackle fraud without being too aggressive and putting customers off. According to Kimberly Sutherland – a senior director of LexisNexis’ fraud and identity management strategy – many merchants don’t quite know how to achieve this balance. The problem she sees is that businesses often resort to a one-size-fits-all approach to fighting fraud, and they end up by deploying a limited set of solutions that are not up to the challenge. “These less advanced and less sophisticated legacy solutions do not appear to be working, given the sharp rise in costs and volume of successful fraud attempts,” she remarks. According to Katz, retailing needs more effective data-sharing solutions in order to prevent such large-scale fraud without denting customer relations. “By leveraging emerging technologies, we can equip merchants and issuers with the right information, at the right place, and at the right time. This helps protect hard-earned revenue for merchants, and also helps them provide better service to consumers – allowing genuine fraud to be addressed quickly and more effectively, thus improving customer trust, retention, and loyalty.” By providing the issuer with merchant information and robust order data – featuring customer identity and intent of sale – early on in the dispute process, it is possible to significantly help prevent such losses, argues Katz. He adds that issuing banks that neglect to include merchants early in the dispute process generate an unnecessarily high chargeback volume. Yet there is still a lack of awareness in the industry about which solutions are readily available to help them mitigate that problem. Integrating the sort of technology that companies like Verifi provide as a tailored service to merchants and issuers can help to dramatically reduce instances of fraud – and indeed help identify friendly fraud, thus saving the sale – while also improving customer relations. Through leveraging and cross-referencing of robust data, customers can enjoy a better overall experience of quick and hassle-free returns and claim legitimate refunds without ever feeling as if they’re being unfairly questioned or targeted. Safeguarding the customer experience is a crucial consideration for retailers looking to implement fraud-tackling technology into their processes, as modern shoppers view flexible return policies as a right rather than a privilege. Customers might refuse to shop with retailers that choose to implement restrictions and checks on returns. Draconian policies could permanently cost a merchant legitimate customers, and therefore prove to be just as damaging as the mounting cost of retail fraud. “Consumer awareness of their chargeback rights has increased,” says Julie Conroy, research director for Boston-based analyst firm Aite Group. “We’ve seen a doubling of the term ‘chargeback’ on Google for the past five years.” In their research, Aite Group found that card issuers often give customers varying degrees of leeway when it comes to accepting evidence for granting a chargeback. Retailers complained to the firm that this lack of consistency led to mixed results from issuer to issuer. Chargebacks protect cardholders from fraud and give them recourse if goods are not as advertised, but the fact that this process is now easier for consumers also means that it is increasingly being abused. “No one likes getting on a 13-minute call with their bank to dispute a charge,” Conroy says. “If you can allow them to do this digitally, you’re providing a better customer experience.” The other issue is cost: the average call is 13 minutes. “For some of these disputes, the consumer could be on the phone for 30 minutes,” she says. “That’s really expensive. The aggregate cost for US issuers alone for call centers to field these calls is $2 billion a year.” This is one of the reasons why so many merchants are now incorporating Software as a Services (SaaS) into their existing systems. Verifi’s Cardholder Dispute Resolution Network (CDRN), for example, is an innovative platform that enables issuers at the initiation of a dispute to redirect customer disputes to the merchant. In doing so, the chargeback process is paused up to 72 hours, allowing the merchant time to assess and resolve the dispute directly with their customer before it becomes a chargeback. In 2017, CDRN handled over 19 million disputes with an average 88% successful resolution rate on actionable disputes. Yet even as retailers move towards embracing these comprehensive, high-tech fraud-prevention systems, offenders will inevitably continue to devise ways of taking advantage of any available loopholes. This is why it is important for SaaS providers such as Verifi to constantly improve their systems to stay ahead of the game. According to Katz, to address such needs, Verifi launched Order Insight in 2017 – an advanced collaboration platform that further applies this principle of intelligently connecting data from merchants to issuers and cardholders to access accurate and timely purchase data. “Order Insight is the next phase in the evolution of our services, where all parties are connected to work together for mutual benefit. By being able to share and access data – such as purchase item description (size, colour, style), date of purchase, merchant’s name and contact information, customer’s device used, IP address, etc. – the volume of chargebacks can be significantly reduced. This results in fewer fees and penalties imposed on merchants – but most importantly in the retention of sales and improved customer relations, all of which translate into increased profits.” Katz explains that “Order Insight enables issuers to access shared merchant data in near real-time at the initiation of a customer dispute. In addition to the goods or services in dispute, detailed information on the cardholder’s transaction history, previous disputes filed, refunds issued, and account delinquency are also instantly available, allowing each issue that arises to be efficiently dealt with to the benefit of all parties.” The device (and type) that was used to make the purchase can be identified, in addition to the name, username, IP address, location, as well as phone number and email address included in the merchant’s customer profile to match the unique cardholder information with the bank’s system. Customers, too, have access to their order details through the issuer-hosted mobile or online banking application, providing immediate answers to a transaction query for a quick and painless resolution. If a transaction isn’t recognized, then the merchant name, address, customer service number and email address – as well as terms and conditions, warranty information and return policies – will be provided to resolve confusion created by vague descriptions on a statement. Whenever a dispute arises, each party will have access to the information to determine the legitimacy of the sale, thus reducing the impact of issues such as friendly fraud. “Shared data can be beneficial in multiple fraud scenarios, and friendly fraud is no exception,” says Conroy, who believes that collaboration solutions, such as Verifi’s, are a crucial part of the industry’s fraud-fighting toolkit. “Connecting the merchant and the issuer early in the dispute process can prevent the loss of millions of dollars in sales,” agrees Katz, and that’s certainly something that merchants and issuers in an increasingly competitive and technology-driven retail landscape will need. Yet even as retailers move towards embracing these comprehensive, high-tech fraud-prevention systems, offenders will inevitably continue to devise ways of taking advantage of any available loopholes