December 10, 2020
by Lijia Gong and Matthew Attwell
Traditionally, November and December make up an important holiday sales period for retailers, and the holiday sales volume continues to grow year over year. Over the past five years, National Retail Federation Data shows that 19% of annual retail sales occur during this period, and this percentage can be even higher for some retailers. In addition, holiday e-commerce sales have also increased: in 2019, 20.1% of total sales in the holiday period were from e-commerce channels.
The ongoing global pandemic makes 2020 an unusual year. E-commerce sales have increased dramatically, and we expect that e-commerce holiday sales will grow exponentially compared to historical levels. After a disrupted year, retailers are eager to capitalize on the booming e-commerce market by opening the holiday season early and extending it from the traditional “November to December” to “October to January” period.
The increased focus on e-commerce and the extended holiday period will be a challenge for retailers, both operationally and from a customer experience perspective (including possible delivery challenges). However, it is not just retailers that have to prepare for the holiday season. There are many important stakeholders involved in the economics of holiday sales. A core stakeholder is the card-issuing consumer bank, which facilitates a large amount of the holiday period consumer payment activity. This white paper looks at the top five fraud issues that consumer banks will face this holiday season.
1. Changing Fraud Patterns Call for Dynamic Fraud Detection
Due to the global pandemic, many brick and mortar retailers are moving holiday sales from in-store to online in order to reduce in-store crowds. Retailers are also extending their holiday sales period as mentioned above (for example, offering Black Friday deals for the entire month of November, instead of just on Black Friday). These changes create an unpredictable retail environment, and for retailers – whose fraud controls are heavily designed on trends from previous years – potential challenges include new fraud patterns, a potentially increased underlying fraud rate, and new genuine customer behaviors. The potential for non-optimized fraud controls provides an opportunity for bad actors to commit fraud, and we expect fraud activity to increase as a result.
For consumer banks, it is more important than ever to adapt quickly to new circumstances and to have a dynamic fraud detection engine in place to capture changing customer behaviors and to support merchants as an effective second line of defense.
2. Extended Holiday Period with Large Transaction Volume Lead to Potential Fraud Management Failure
This year’s extended holiday period is unprecedented for retailers. The sustained large volume of online or phone-based buying, mixed with the unpredictable behavior itself, will stress-test both automated fraud detection systems and the flexibility and scalability of operations teams.
Consumer banks face potential losses if their systems and processes are not optimized to handle the sustained surge in online activities. For detection systems and operations teams that are not prepared to handle the increased volume through the extended period, fraud management failure can happen at any step in the process, from the front office to the back office and from system to human failure. The cost of fraud management failure may not just be financial, as the reputational cost associated with any significant failure could also impact customer retention.
3. Customers Unfamiliar with E-Commerce Shopping and Payments Fraud May Face Increased Risk of Scams, Account Takeover, and Identity Theft
The increase in e-commerce spending will be driven by a large consumer population who will either be using e-commerce for the first time or buying items for the first time that they would normally purchase in person at this time of year. Fraudsters will target this population, and there will likely be an increase in fake websites and email phishing attempts (such as promotions or discounts) to commit shipment fraud or to harvest credentials for account takeover.
In some cases, with man-in-the-middle attacks that are not transparent to the consumer, individuals may never realize that their credentials or identity have been compromised. Fraudsters may wait until after the holiday period to fraudulently apply for new products and services using the stolen identity. The fraud impact of the holiday sales period may therefore continue for many months into the new year.
4. Customers Unfamiliar with E-Commerce Shopping and Payments Fraud May Generate Increased Disputes and Chargebacks
With the shift towards e-commerce, many retailers will rely far more on their e-commerce channels than in previous years. The global pandemic has pushed many businesses to upgrade their e-commerce capability in response to the shift, but retailers likely will face further surge activity. Fraudsters will target this surge period in the hope that retailers’ fraud defenses will be overwhelmed, which may in turn increase dispute and chargeback activity for consumer banks. Retailers are liable for the chargebacks, but banks will need additional resources to process these claims.
5. Economic Hardship May Increase Friendly Fraud
The global economy is still affected by the Covid-19 pandemic, and many individuals will face unexpected hardship this holiday season due to job shortages or concern over the long-term health of the economy. Typically, fraud levels increase in times of economic hardship, so this likely will result in increasing levels of so-called friendly fraud, in which consumer bank customers commit fraud (including return fraud) through dishonesty.
The many challenges facing financial institutions during this holiday period are exceptional and are expected to increase exponentially in comparison to previous years. During this period, it is more important than ever for financial institutions to have real-time insight and forecasting to help manage emerging threats and to stay responsive to customers. This year likely marks a turning point in the shift towards e-commerce, so any investments made in fraud management capability for this holiday period will most likely benefit financial institutions in future years as well.