Fraud attempts against luxury fashion retailers rose in 2015, driven largely by bots that grew from 33% of attempts in Q1 to 82% by Q3. The bigger cost, however, is false declines, which were estimated at $118 billion per year versus $9 billion in fraud, plus the damage of rejecting legitimate cross-border shoppers who spend roughly three times the average domestic order. Balancing fraud control and customer experience requires precise, customized mitigation that combines machine learning with skilled fraud analysts who can verify orders in real time.
Fashion Digital LA is one of the biggest shows in fashion retailing and tech, and we’re bringing our e-commerce merchant solutions to next month’s event. With Fashion Digital in mind, we’ve been looking at how the fraud landscape is changing for US-based digital fashion merchants. Over the first three quarters of 2015, both fraud attempt frequency and attempted fraud amounts rose in the luxury category - which includes designer clothing, shoes, and handbags - according to PYMNTS.com’s Global Fraud Attack Index. The source of this fraud upswing may surprise you, but there are solutions to combat the rising tide without increasing the already unacceptably high number of falsely declined transactions.
Who’s behind the rise in fashion fraud, and where is it coming from?
Bots are the main culprits, deployed by human fraudsters operating malicious networks that target luxury e-commerce retailers. Suspected bots are responsible for a staggering share of fraud attempts over the first 9 months of 2015, rising from 33% of the total in Q1 to 82% by Q3, per the Index. Bots now lead all fraud types, whether they originate in the US or abroad.
Just how risky are cross-border luxury goods orders?
Not necessarily as risky in general as you might expect, according to the Index. It found that fraud attempts originating inside the US are happening more frequently, although the average amount per transaction attempt is decreasing. That means merchants stand to lose revenue based on the volume of domestic fraud attempts that succeed.
Fraud attempts originate less often from the EU and the rest of the world, but for higher attempted transaction amounts, meaning merchants stand to lose more if a fraudulent purchase goes through. But an overly broad policy of declining cross-border transactions can hurt revenues more than fraud itself. For example, the National Retail Federation reports that while 2% of orders on Chinese credit cards at US retailers are fraudulent, retailers reject up to 5%.
The problem is lack of balance. E-commerce fraud costs $9 billion per year, but false declines cost $118 billion, plus the cost of damaged or lost relationships with falsely rejected customers. Stemming these losses requires precise, customized fraud mitigation methods that take into account the cost of fraud as well as the costs of lost revenue and customer loyalty.
Bringing balance to luxury fraud management
Upscale e-commerce retailers face a unique situation in balancing fraud control and customer experience. Cross-border luxury shoppers spend more than domestic consumers--about 3 times the average domestic order amount, according to the National Retail Federation. Legitimate cross-border purchases represent a valuable and growing revenue stream for e-commerce merchants as more middle-class consumers in China, India, and other rapidly developing economies begin shopping on their mobile devices. But those high order totals, coupled with overseas order origination and geolocations that may not match shipping or billing addresses (due to customers’ travel for work and leisure) are flags for potential fraud that cannot be overlooked.
Machine learning and ever-advancing fraud-spotting algorithms are part of the solution, especially as suspected bot fraud rises. In our experience, balance comes from the judgment of talented fraud analysts who evaluate suspected fraud in real time, up to and including contacting the customer directly to verify order legitimacy. Our clients have seen how this extra step insures proper fraud mitigation, reduces false declines, and strengthens customer relationships—and revenue streams--going forward.
Are you ready to talk about fashion fraud and ways to manage it? We’ll be exhibiting during Fashion Digital LA at the W Hollywood Hotel, May 9-10. Email us at contact@clear.sale to pre-arrange a meeting, and we’ll see you there.
Frequently Asked Questions
What is driving the rise in fashion fraud?
Bots deployed by human fraudsters running malicious networks are the main culprits behind attacks on luxury ecommerce retailers. Suspected bots rose from 33% of fraud attempts in Q1 2015 to 82% by Q3, leading all fraud types whether they originate in the US or abroad.
Are cross-border luxury orders riskier than domestic ones?
Not necessarily in general. US-originating fraud attempts happen more frequently but at decreasing average amounts, while EU and rest-of-world attempts are less frequent but for higher amounts. An overly broad policy of declining cross-border orders can hurt revenue more than fraud itself.
How do false declines compare to the cost of fraud?
E-commerce fraud was cited as costing about $9 billion per year, while false declines cost roughly $118 billion, plus the cost of damaged or lost relationships with wrongly rejected customers. This imbalance shows false declines are the larger problem for many retailers.
Why are legitimate cross-border shoppers valuable to fashion retailers?
Cross-border luxury shoppers spend about three times the average domestic order amount, according to the National Retail Federation. As more middle-class consumers in developing economies shop on mobile devices, these legitimate purchases are a valuable and growing revenue stream.
Why do legitimate cross-border orders get flagged as fraud?
High order totals, overseas order origination, and geolocations that may not match shipping or billing addresses, often because customers travel for work or leisure, all look like potential fraud flags. These signals cannot be overlooked but should not automatically trigger a decline.
How can fashion retailers balance fraud control and customer experience?
Machine learning and fraud-spotting algorithms are part of the solution, especially as bot fraud rises. Balance comes from skilled fraud analysts who evaluate suspected fraud in real time, up to contacting the customer directly to verify an order, which reduces false declines and strengthens relationships.
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