How to stop fraud ruining your holiday selling season

[September 24th 2001]

Taking a look at past, present, and future holiday shopping seasons can provide solid guidance on what merchants can do to protect their business. Merchants must learn from the past, take common sense steps for today, and prepare for the future to stay one step ahead of fraudulent activity.

Julie Fergerson, vice president of emerging technologies and co-founder of ClearCommerce Corp., knows that today's fraudsters are sophisticated, and continually develop the tools of their trade in an attempt to steal merchants' hard-earned revenue. It's not too late for online merchants to keep fraud to a minimum this holiday season, and lay a solid foundation to protect their business.

Christmas Past

Last holiday season (2000) we saw a form of fraud that had been seen to a small degree before, Shipment Rerouting. One of the most commonly used indicators for online fraud detection is the one that flags orders being shipped to an address that is different from the credit card billing address. Shipment rerouting is a popular scheme developed to evade this type of screening method.

Under this fraud scheme, orders are initially placed with matching ship-to and bill-to addresses. After the order is approved and the fraudster has received confirmation and delivery information from the merchant, the fraudster changes the delivery address by calling the shipping or delivery company directly. The fraudster then collects the merchandise at the new delivery address. In most cases, the merchant isn't even aware of the switch.

Recommended Action: Mask the tracking number from view from the customer. Many merchants offer a package tracking service on their Web site, which is a valuable customer service tool. It is recommended, however, that merchants keep customers on their site and hide the shipping vendor's tracking number from view.

Christmas Present

In the past year, we have seen steady growth in international fraud. In late 1999, ten percent of International orders were fraudulent. In 2000, this increased to 40 percent, and we have continued to see a steady growth throughout 2001. To combat this emerging trend, merchants should adopt strong measures to identify and carefully review international orders.

Unfortunately, it is not easy to determine where orders originate. Approximately 23 percent of fraudulent international orders used U.S. billing and shipping addresses. The good news is that there are solutions to help. Tools that track IP address are effective in identifying where orders come from, and will be the most effective this holiday season and beyond.

Additionally, there are six basic things every merchant should implement to keep fraud to a minimum. This is by no means a complete list, but more the "low hanging fruit" that merchants should be able to implement in time for this holiday shopping season.

1) Have a plan to handle orders that look suspicious. Online merchants should be able to flag orders that look suspicious and have a human being review them. Some of the things that might mark an order as suspicious and needing review include high dollar order with a large number of small products, particularly those that would be easy to resell. For example, if you have an order for $1000, but it contains 50 DVD movies, be suspicious and confirm the order. DVD movies are easy to sell out of the back of a van.

2) Implement a negative file. We have found that if someone has successfully committed fraud against a merchant, they are more likely to attempt it again. One of the best ways to combat this is to keep track of those that have committed fraud against you. To do this, create a "negative file" that contains key pieces of information from previous fraudulent orders. Then compare new orders to the negative file and flag those that have matching characteristics for review. Key fields to include in a negative file are the shipping address, email address, and IP address.

3) Don't ever reject a consumer. With a negative file, it is important to simply mark suspicious orders for review. Do not reject orders too easily as you might be turning away good business. On the Internet, a little bad publicity goes a really long way, and in the wrong direction!

4) Implement Card Verification Method (CVVC, CID, CVV2). This is a new three or four digit code that is printed, but not embossed, on the credit card. This means that it does not show up on receipts, which are a common source for fraudsters to obtain credit card numbers. Asking for this information and using the processors and banks to verify that the code and credit card numbers match can help you ensure that the person entering the card number actually has the card in their possession. Recent research has shown card verification reduces fraud by 70 percent.

5) Send an email receipt. Make sure the email receipt you send to customers includes a toll free number and information about the products ordered. Put the name of the store in the subject line of the email to help customers easily identify and keep track of their orders. Most importantly, have someone monitor "bounced" and returned email receipts, and follow up to ensure orders are not fraudulent. You would be surprised how many consumers reply with "I didn't purchase this" and the merchant never even looks at the email.

6) Have your company name and a toll free number printed on the credit card statement. When setting up your account to accept credit cards, a store name and phone number are configured in the system. Make sure this name reflects your URL. It is very confusing to purchase something from a particular Web site and have a different name appear on the credit card statement. Be consistent. Also, make sure the telephone number you provide to customers is toll-free. Customers are much more likely to call a toll-free number than to contest the charge through their credit card issuer later. Remember, when a consumer contests a charge, the fees start to rack up, not to mention the time you spend researching the order. Be proactive.

Christmas Future

As mentioned at the beginning of this article, fraudsters are resourceful and aggressive in their pursuit of merchants' hard earned revenue. They continue to come up with new tools and tactics that merchants will need to be able to quickly recognize and respond to in order to protect their online business and customers.

Successful and cost-effective fraud prevention can only be achieved by implementing a comprehensive risk management process, which is enabled by fraud detection and case management tools. Today's best practice approach is based on an arsenal of automated fraud screening techniques to maximize the efficiency of the order verification process. Every fraud detection technique has its limitation; no tool can identify all types of fraud and every tool is best at identifying one particular type of fraud. Only by compounding the benefits of an array of tools can merchants effectively defend themselves from the threat of fraud today, and lay a foundation for protection against techniques that are sure to be developed in the future.

Links
ClearCommerce		http://www.clearcommerce.com