A Rise in Fraud Keeps Online Merchants on Toes. An overview of how fraud affects the digital goods industry and the industry solution

A Rise in Fraud Keeps Online Merchants on Toes. An overview of how fraud affects the digital goods industry and the industry solution
Jan 7, 2021

A spike in fraud is expected during “normal” holiday seasons, but is especially the case this year, as the volume of consumers shopping online has exploded. So much so that, according to data released from IMB’s U.S. Retail Index, COVID-19 has accelerated the shift away from brick and mortar stores and towards e-commerce by an estimated five years.

Given this drive toward digitization across businesses globally, it is vital that merchants wishing to keep up must fundamentally change the way they do business in order to protect themselves and their online consumers.

According to the National Retail Federation’s 2019 Holiday Trends, 54% of shoppers gave gift cards to family, friends and colleagues last year. With winter coming and cases of infection still rising daily, we can only predict the percentage of gift cards that will be sent this year over experiences and physical gifts. This is not great news for merchants.  Anonymous and untraceable, gift-cards are like digital cash. They provide exceptional cover for scammers at the best of times; add a surge in transactions during a peak sales period, and history of merchants loosening their fraud controls during major shopping seasons to prevent bottlenecks, and we have ourselves a recipe for a fraud fiesta.

Before we get to the solutions, let’s really investigate the various ways that digital goods like gift cards are used to finance fraud: 

  • Stealing account details and buying gift cards

Because so many of us store our bank details online, it can be easy for scammers to take over an online shopping account and buy as many gift cards as possible to spend or cash before they are caught.

  • Buying online gift cards with stolen credit card data

This is classic card-not-present fraud! A thief will use stolen payment data to buy gift cards online and then resell them for cash. Once discovered by the credit card holder, the merchant gets hit with a chargeback.

  • Requesting gift cards instead of an exchange or refund

It’s a straightforward setup: the scammer buys merchandise online with stolen payment data. Once the order is approved, they cancel and request a refund on a gift card. Because the gift card cannot be traced, if the holder of the credit card discovers the fraud, then the merchant gets a chargeback.

  • Stealing gift card numbers in bulk

This requires hacking the merchant, which can happen in a variety of ways: Phishing, SQL injection, corrupting employees, pouncing on accidental data exposure, and more. It’s a simple trick and very costly to the retailer.

There are other ways fraudsters exploit gift cards and, thankfully, a number of ways merchants can prevent this. Of course, part of this involves employee training. For example, employees at Kroger Mid-Atlantic, Apple, Best Buy and Target train their employees to be on the lookout and engage with customers to ensure no scam is taking place, refusing transactions if necessary. Best Buy, Target, and Walmart have also placed limits on the purchase and use of gift cards to reduce fraud.

However, all the employee training in the world won’t matter if data security is not prioritized. As the global consumer landscape moves further online, upended by the COVID-19 crisis, merchants need to protect their business from sophisticated hackers and data theft - maintaining the fragile customer trust that they have worked so hard to earn.

Welcome to a new and couldn’t-come-sooner generation of payment solutions. With deceptively low-latency responses and a vast network to other e-commerce companies as well as credit card issuers and financial service providers, these solutions allow for a truly borderless marketplace – one where fraud is reduced while consumers freely transact with merchants big and small, encountering minimal friction.

Whether it is for physical goods or digital goods, a gift during the holiday season, or an everyday need, retailers need a solution that catches fraud early in the purchase process in order to save on the cost of the lost transaction, reducing chargebacks and associated fees. And, most importantly, they need a solution that responds immediately and accurately, keeping customers happy, improving retention, reducing friction, and boosting customer lifetime value and sales. 

In under 100 ms, a product like Ekata’s Transaction Risk API helps maximize approval ratings early in the transaction flow while simultaneously fighting transaction fraud. Specifically built for easy integration into machine learning models, this award-winning product is designed to help eCommerce merchants, marketplaces, payment processors, and others predict and prevent the transactions that are most likely to end in fraud.

As a global leader in identity verification, Ekata’s latest innovative solution scores core identity data elements of names, email addresses, phone number, home address, and/or IP, delivering a concise response to both the buyer as well as the recipient.

Whether it’s in preparation for a busy holiday sales period, or if it is to simply appreciate that one of the consequences to 2020’s chaos is the need to digitize one’s business just to stay in business, a fraud solution suite with unparalleled coverage and accuracy from around the globe is your first port of call.

About Ekata:  Ekata provides global identity verification solutions via enterprise-grade APIs for automated decisioning, and Pro Insight, a SaaS solution for manual review for cross-border businesses to grow revenue by maximizing their predictability of good transactions. Ekata’s product suite is powered by the Ekata Identity Engine (EIE), the first and only cross-border identity verification engine of its kind. It uses complex machine learning algorithms across the five core consumer attributes of email, phone, name (person or business), physical address, and IP, to derive unique data links and features from billions of real-time transactions within our proprietary network and the data we license from a broad spectrum of global providers. Businesses around the world including Alipay, Microsoft, Stripe, and Airbnb leverage our product suite to increase approvals of more good transactions, reduce customer friction at account opening, and find fraud.
The Merchant Advisory Group

Driving positive change and innovation in the payments industry that serves the merchants interest through collaboration, education, and advocacy.