Radial’s Annual Holiday

Fraud Index

The fraud landscape is rapidly changing and presents pervasive and growing threats for eCommerce merchants. The holiday season adds an additional layer

of stress, with merchants scrambling to scale their operations for the massive influx of orders and the inevitable uptick in fraud.

Developed by Radial’s data scientists in their Fraud Technology Lab, the 2016 Annual Holiday Fraud Index uses data from hundreds of clients

and billions of data elements to uncover six trends across EMV, cross-border, and digital gift cards that could put retailers’ bottom

lines at risk this holiday season and beyond.

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EMV, Cross-border and Digital Gift CardsEMV, cross-border and digital gift cards pose unique problems that have significantly impacted the fraud landscape and how merchants manage fraud. The holiday season provides a unique opportunity to delve into these issues and reveal some valuable takeaways.

In today’s retail ecosystem and particularly during the holidays, genuine customers and criminals alike are flocking toward the quickest, simplest, and most convenient method to acquire goods, and for the latter, perpetrate fraud. The biggest challenge for merchants is making the right distinction between a real customer versus a criminal, and for many merchants that’s a tough nut to crack. Radial’s holiday-focused research provides a lens into fraud trends that could help merchants be more right than wrong this holiday season.

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EMV Trends

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Trend 1: Card-Not-Present fraud garners the largest share of fraudulent activity with fraud attack rates increasing in nearly every market segment.

EMV is a three letter acronym merchants know all too well. While some merchants may have some choice four letter descriptors for the EMV conversion process, it’s important to understand the growing role EMV plays in CNP fraud. Last holiday season, EMV conversion was far too fresh to ascertain the impact, and although we hit the one-year mark on October 1, it’s probably still too early. A post 2016 holiday analysis may show additional insight.

Having said that, there are reports that support a shift from card-present-fraud to CNP fraud. Counterfeit fraud dropped 18 percent in the first quarter of 2016–reaching its lowest point since 2013. But there was a rise in other segmented categories, including identity theft, fraudulent applications, and lost/stolen fraud. Most significant, there was a 12 percent rise in CNP fraud during the same time period, which now represents the largest category of fraudulent activity.1

While these may be troubling statistics for eCommerce merchants, EMV should not be singled out as the lone culprit. Prior to EMV, CNP fraud was already growing because the pool of potential fraud orders is also growing as overall eCommerce sales experience a 14 to 17 percent growth rate, year-over-year since 2010.2 While EMV adoption started out slow with only 37 percent of U.S. retailers ready to process chip cards in late January 2016, the Strawhecker Group estimates that 72 percent of U.S. retailers will be EMV ready by December 2016. While there are differing opinions regarding EMV readiness, these factors combined with increasingly organized, tech-savvy criminals and the increased prevalence of data breaches make it difficult to single out EMV as the sole contributor to an increase in CNP fraud.

However, we can state unequivocally that criminals will always choose the path of least resistance. Clamping down on card-present-fraud will continue to cause criminals to shift their focus to the CNP space. Since EMV’s launch in October 2015, Radial has seen on average a 30 percent increase in online fraud attacks across its client base.

1 “Counterfeit Credit Card Fraud Reaches Lowest Level Since 2013; Other Fraud Types Increase, says Auriemma Consulting Group” http://www.acg.net/counterfeit-credit-card-fraud-reaches-lowest-level-since-2013-other-fraud-types-increase-says-auriemma-consulting-group/

2 “U.S. E-Commerce Grows 14.6% in 2015” https://www.internetretailer.com/2016/02/17/us-e-commerce-grows-146-2015

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Figure 1: Fraud Attacks by Market Segment One Year Post EMV

Apparel Cosmetics Electronics Entertainment Home Jewelry Shoes SportingGoods

2015 2016

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Figure 1 depicts the average attack rate by market segment one year after the introduction of EMV. It shows an upward trend in CNP fraud in nearly every market segment with Electronics, Entertainment, Jewelry and Sporting Goods seeing the most significant increase in attacks in October 2016.

When looking at the top four market segments by month as depicted in Figures 2 and 3 below, there are some interesting takeaways. Electronics for example saw a dramatic spike in attack rates in Q1 2016, before tapering off. Big box retailers like Best Buy were ready for EMV by the October 1, 2015 deadline. Fraudsters may have thought this offered a larger window of vulnerability to move their attacks online. While each market did see spikes at varying times during the year, Jewelry, Sporting Goods and Entertainment all have been trending upwards since August, which may foreshadow what’s to come during this year’s peak season. These charts also show how challenging it is to predict when and what markets will be at higher risk for fraud attacks.

This holiday season, more and more merchants will be EMV ready. eCommerce merchants should digest the segmented trending numbers and expect, and prepare for, an increase in online fraud attempts compared to last year. While Home and Shoe merchants appear to have less comparative risk, all merchants will be an attractive target for online fraud.

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Figure 3: Entertainment and Sporting Goods Fraud Attacks

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Cross-Border Trends

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It is extremely important for merchants to think globally. In 2015, 35 percent of consumers shopped on sites based outside of their home country, up from 26 percent in 2014. As cross-border eCommerce continues to grow, total global revenue is projected to reach nearly $2 trillion of worldwide retail sales by 2018.3

Cross-border logistical complexity and elevated fraud risk often turn retailers away from growing their global presence. While the challenges are real, cross-border eCommerce is a lucrative endeavor that takes advantage of a previously untapped consumer base—especially during the holiday season. Following is a deep dive into the beefiest cross-border eCommerce days of the year, as well as a snapshot of the riskiest and most lucrative countries.

3 PFS Web, Online Retail Cross-border Sales: The Global Trend That’s Here to Stay

Trend 2: Some cross-border countries represent greater risk while others offer higher sales potential.

Not all countries present the same risk/reward relationship. It is important for merchants to perform a data-driven analysis for the countries they are considering for global eCommerce expansion.

Radial’s 2015 holiday season data from November 22, 2015 through January 1, 2016 shows the top and bottom five countries’ cross-border eCommerce attack rates, as well as the countries with the highest sales potential.

As we delve into the riskier band of countries, Venezuela has the highest cross-border eCommerce attack rate at 17.04%, while the U.S. Virgin Islands has one of the lowest at 0.06%, as well as the highest order approval rates at 99.77%.

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Highest Attack Rates

Venezuela 17.04%

Ghana 11.68%

Nigeria 6.90%

Angola 6.73%

Russia 5.00%

Lowest Attack Rates

United ArabEmirates 0.05%

U.S. VirginIslands 0.06%

Guam 0.07%

Guam 99.65%

Turkey 0.09%

Antigua &Barbuda 0.16%

Highest OrderApproval Rates

Puerto Rico 99.71%

Italy 99.69%

Kuwait 99.68%

U.S. VirginIslands 99.77%

APAC is ripe for cross-border eCommerce.

Not surprisingly, the Asia-Pacific (APAC) region dominates sales figures for cross-border countries. This region represents a sensational opportunity for merchants to cash in on an extremely large consumer base. Data from Cross-Border eCommerce Fraud as indicated in Figure 4 shows China, Japan, and Korea account for nearly 50% of year-round cross-border eCommerce sales in the Cosmetics and Home market segments.

For Radial clients, Korea and China top the list for cross-border sales during the holiday season, accounting for more than 78% of sales among the top five cross-border countries. Chinese demand for foreign goods as a whole is exploding. It is estimated that by 2020, a quarter of China’s population will engage in eCommerce directly on foreign-based sites or through third parties. This population will make up half of all digital buyers.4 A report from Accenture/AliResearch predicts that there will be more than 200 million Chinese cross-border shoppers within the next five years, and that the transaction volume of imported goods purchased online in China will hit $245 billion by 2020, making it the largest cross-border B2C market in the world.

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Figure 4: Cross-Border eCommerce Sales

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oods

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Total eCommerce that are Cross-Border Cross-Border Sales that are China, Japan and Korea

4 eMarketer, China Embraces Cross-border eCommerce.

There are a variety of factors contributing to this growth, including a growing middle class who craves imported goods and rising Internet and smartphone penetration rates—particularly in rural regions that previously had no or limited Internet access. Regardless of the reason, Chinese shoppers are clearly unleashing their buying power on foreign sites. If merchants ignore every other cross-border opportunity (which we don’t recommend), don’t ignore China.

Singles Day Significance

Singles Day originated as a festival and celebration by and for single people in China. In recent years, this celebration exploded into a Chinese eCommerce holiday that has eclipsed one-day shopping sales records. In 2015, Singles Day raked in a record $14.3 billion compared to Cyber Monday sales of $3.07 billion.

While this holiday focuses on Chinese eCommerce, technology penetration and cross-border eCommerce growth will increasingly break down the barriers between this tremendous consumer base and U.S. eCommerce merchants. Singles Day provides a glimpse into the buying power a single country can offer, and is another marker for cross-border eCommerce opportunity.

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Trend 3: Cross-border attack rates drop significantly on Cyber Monday.

We talked earlier about the significance a single day can have on sales. Everyone is aware of the enormous influx of sales on Cyber Monday. However, merchants may not be aware of the large role cross-border plays in this revenue stream. Our data shows that merchants can be approving up to 98.59% of cross-border eCommerce orders on Cyber Monday. Across our enterprise clients, that’s a cross-border sales figure that surpassed $3.8 million for Cyber Monday in 2015. That’s not the only good news. Cross-border fraud attack rates dropped over 33 percent on Cyber Monday in 2015, as compared to the rest of the holiday season giving merchants an opportunity to tap into cross-border sales on one of the busiest days of the season.

Despite this rosy picture, Radial, through its work with some of the world’s favorite brands, is finding that many retailers are still diagnosing too much cross-border fraud, and losing out on millions as a result.

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98.59% Order Approval Rates

33% Decrease in Fraud Attack Rates

$3.8M+ Sales

Digital Gift Card Trends

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Trend 4: Digital gift card fraud spikes after December 25.

There is nothing more attractive to a criminal then a completely digital attack that provides the speed and anonymity they crave. These attacks can be carried out in a variety of ways, but digital gift cards are perhaps the most popular choice of criminals.

Stealing gift cards gives criminals immediate access to the stolen funds that they can use or resell very quickly. However, digital gift cards are also an extremely popular choice for loyal and legitimate customers, making them a must-have option for merchants. While criminals are banking on the fact that their gift card purchase will process quickly, so too are legitimate customers—especially those making last minute purchases during the holiday season. For merchants, any processing delays will have a detrimental impact on the customer experience. This pressure intensifies during peak season, when merchants attempt to satisfy an incredibly large demand for digital gift cards while simultaneously protecting against fraud losses.

Radial’s Fraud Technology Lab zeroed in on a digital gift card trend that occurs immediately after Christmas. From December 26th to January 1st, digital gift card attacks spike dramatically, with criminals taking advantage of the post-holiday lull. Additionally, digital gift card fraud attacks are 10X more likely compared to other delivery methods during the holidays. That jumps to almost 25X more likely the week after Christmas. However, even with these insanely high attack rates, merchants can still be approving nearly 98% of digital gift card orders throughout the holiday season.

Criminals are very aware of the toll fraud prevention takes on merchants during the holiday season. Merchants typically lighten staff after Christmas. Plus, they are dealing with an influx of returns where many legitimate customers are exchanging merchandise for digital gift cards. It’s the perfect time for criminals to double down on digital gift card attacks and get lost in a sea of authorized transactions.

While one might think that digital gift card fraud is in direct correlation with sales volumes, the data shows just how unpredictable fraud attacks are. Attack rates fell on Cyber Monday and Free Shipping Day, but spiked the day before each. The data also shows even criminals take a break for Christmas, as attack rates hit a seasonal low. But as mentioned earlier, they come back with a vengeance after December 25 with a final surge around the New Year.

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Digital Gift Card Attack Rates Spike Post Holiday

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Trend 5: Digital gift card attack rates soar for some billing and shipping domains and payment tenders during the holidays.

Radial’s data reveals some additional digital gift card fraud trends at play during the holiday season. When drilling down on attack rates by email domain, Outlook.com presents a particularly high risk when it is used as the billing email domain. That attack rate doubles when Outlook.com is both the billing and shipping domain. AOL.com also presents an elevated attack rate when used as both the billing and shipping email domains.

Some payment types are also riskier for digital gift card purchases during the holiday season. Discover can be a red flag for fraudulent activity with attack rates hovering around 200% higher than its nearest competitor.

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Email Domain Attack Rates

AOL.com Gmail.com Hotmail.com Outlook.com Yahoo.com0.00%

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Digital Gift Card Attack Rates by Tender

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Trend 6: IP locations and credit card BIN countries carry different risk factors for digital gift card purchases.

We took our digital gift card analysis global and unearthed some extremely high attack rates when drilling down on different international components. Our data reveals the top five credit card Bank Identification Number (BIN) countries for digital gift card attack rate, with the riskiest country, Mexico, ballooning to over 25 percent. When you change the data point to international IP, the top five countries continue to maintain exceptionally high attack rates. Colombia had the unique distinction of showing up on both top five lists, with attack rates eclipsing the 20 percent mark for both IP and BIN.

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Credit Card BIN Country Attack Rate

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France Netherlands China Mexico

What does all this mean?The magnitude and financial implications of the holiday season requires critical strategic and operational decisions. Surging order volume, operational constraints, and soaring customer expectations are norm for merchants during the holidays. However, eCommerce fraud management continues to challenge many merchants, and in today’s retail reality, the challenges have grown much more complex. The answer, however, is not to sit on the sidelines and play conservatively, avoiding riskier ventures like digital gift cards and cross-border eCommerce.

The answer is a blend of robust technology, big data, and human ingenuity to thwart the expected influx of CNP fraud, enable global expansion and new service offerings, and ultimately frustrate criminals and delight loyal customers. This approach delivers the quickest, most accurate decisions; it scales seamlessly, and it agilely adapts with the ever-changing eCommerce fraud ecosystem.

When you consider a real-world scenario, the choice becomes clear: The current fraud management provider for an online retailer of sports apparel is canceling 1 percent of orders for fraud, which calculates to $11MM in lost sales. With Radial’s solution that consists of people, process, and technology, just 0.3 percent of orders would be canceled, increasing the retailer’s sales by $7MM.

Is your fraud management solution up to the same task?

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About Radial Radial is the leader in omnichannel commerce technology and operations, enabling brands and retailers to profitably exceed retail customer expectations. Radial’s technical, powerful omnichannel solutions connect supply and demand through efficient fulfillment and transportation options, intelligent fraud, payments, and tax systems and personalized customer care services.

Hundreds of retailers and brands confidently partner with Radial to simplify their post-click commerce and improve their customer experiences. Radial brings flexibility and scalability to their supply chains and optimizes how, when and where orders go from desire to delivery. Learn how we work with you at www.radial.com. Or contact us:

sales@radial.com

1-877-255-2857

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