Retailers need to be extra careful these days when it comes to fraud prevention and fraud detection, as the deteriorating economy adds to fraud pressure. The overall unemployment rate, while still low in historical terms, is rising. Layoffs by U.S. companies over January and February 2023 reached the highest levels seen since 2009, according to Reuters. Moreover, more than a third of the 180,000 job cuts announced were in the high-paying tech sector. The retail and financial services sectors are also experiencing cuts, while U.S. manufacturing entered a recession in the fourth quarter of 2022. On the stock market, the S&P 500 dropped 19 percent over 2022 and after a slight rebound in early 2023 is still 18 percent off it’s peak. The negative wealth effect means that people will spend less as they feel poorer due to the declining value of their investments.
Retail sales also fell close to half a percent (and even more if you take inflation into account) in February after showing healthy growth in January, suggesting that the impact on consumers of the Fed’s interest rate hikes is starting to be felt. If retail spending continues to decline, which right now appears likely, expect fraud pressure to increase.
Fraud pressure is the number of fraudulent transactions as a percentage of total transactions. In practice, the level of fraud while subject to some seasonal variation is relatively constant when it comes to macroeconomic changes in demand. The reason is simple, most eCommerce fraud is perpetrated by professional fraudsters. These fraudsters, often members of loosely organized crime groups, make their livelihood from crime and don’t determine whether they commit, increase or decrease the scale of their crimes based on macroeconomic conditions.
On the other hand, consumer demand is definitely sensitive to macroeconomic conditions. When people are earning less money or are unemployed they spend less on goods and services, meaning they participate in less transactions. What that means for fraud pressure is that this ratio increases during periods of economic downturn as fraud levels stay put but transaction levels drop. To phrase it differently from a merchant perspective, during a recession a larger share of your transactions are likely to be fraudulent than during a boom period.
Please note that this is on a macro level. We are already seeing this year's data from the credit card networks that certain categories, such as travel and lodging, are experiencing double-digit growth in transactions. For these specific verticals, fraud pressure will be alleviated. However, for most of the economy that won’t be the case. Fraud pressure will grow due to decreasing demand, even though organized crime activity doesn’t change in tune with the economy.
That doesn’t mean that absolute fraud levels aren’t growing around the globe. They are. According to HUMAN Security CTO Frank Walsh in a presentation delivered at MRC Vegas 2023 titled “How Organized Criminals Built the Bot Economy to Target Merchants,” account takeover (ATO) attacks rose 15 percent in the past 12 months, while new account fraud grew 64 percent. Meanwhile, scalping bot attacks jumped a shocking 72 percent. This growth in fraud levels is due to organized criminals getting better at using technology to scale their attacks. However, it is happening independent of what is going on in the broader economy.
From the victim perspective, the number of online victims is growing in general as well and is apt to grow even more during an economic period where prices are rising fast and people are looking for deals.
For example, did you know that when you see U.S. postage sold at a discount it is almost always counterfeit stickers manufactured in China? That little chestnut was shared by U.S. Postal Inspector Brian Plants at the Law Enforcement Workshop at MRC Vegas 2023. According to Plants, the stickers are nearly indistinguishable from legitimate postage to the naked eye.
At the Law Enforcement Workshop, the FBI’s Melissa McBee-Anderson told the room that the Internet Crime Complaint Center (IC3) already has 7.3 million complaints in its database and receives over 800 complaints per day. She also told workshop participants at MRC Vegas 2023 that only 15 percent of scams in the U.S. are reported.
Organized crime is always working around the clock. However, there is also an exception to the generalization that fraud levels stay constant relative to economic fluctuations. During an economic downturn, more amateurs decide to get involved in fraud, whether that means trying their hands at using stolen credit card information (i.e. third-party fraud, AKA true fraud) or engaging in chargeback fraud (i.e. first-party misuse, AKA friendly fraud). In the case of chargeback fraud, the effect of a downturn is significant.
Indeed, Visa reported a 20-30 percent increase in friendly fraud last year, as the markets turned south and inflation roared through the U.S. and U.K. In fact, the term friendly fraud was coined in the wake of the 2008 Great Recession to capture the fast growing trend of customers claiming fraud after receiving goods purchased with their own credit cards. Given the significant job cuts that have occurred in recent months and still high level of inflation, more people will experience buyer’s remorse and seek to recoup money they don’t have that was already spent on goods and services. Some people will also become outright “liar buyers,” people who intentionally buy goods with the intent of defrauding the merchant with an illegitimate chargeback. It’s one way to keep up your lifestyle and patterns of consumption when you no longer have the disposable income to afford it.
To understand what I mean, take an example of friendly fraud that was circulating on TikTok a few years ago. In it, a young woman, let’s call her Jane Doe, called up her credit card issuer to tell them that she had a large charge from Louis Vuitton. She claimed it couldn’t have been her because she was at work and couldn’t even pronounce the name Louis Vuitton properly. She said all this while standing outside the store holding her shopping bags. The bank dropped the charge. That in a nutshell is a liar buyer.
Now, in real life, as depicted in the TikTok video, liar buyers often don’t commit friendly fraud just once. They do it repeatedly. In fact, according to Visa, 40 percent of individuals who commit friendly fraud will do so again within 90 days.
That means Jane didn’t just go to Louis Vuitton once, she did so repeatedly. She probably went to Gucci and Hermes for good measure as well. Get in while the going is good, right?
What that means is you can expect friendly fraud will grow substantially this year, just as it did last year, as more people are introduced to the world of friendly fraud and decide to stay for a while. Once friendly fraud is normalized for these people, many will try to use chargebacks repeatedly as a way of improperly recovering money legitimately exchanged for goods and services, until the moment they are caught and blocked.
To sum up, expect fraud and fraud pressure to go up this year as the economy goes down. This won’t be because the organized criminals are working harder. It will be because they are getting smarter and more amateurs and victims will be tempted by financial pressure to play a role in fraud schemes.
It will mean that fraud, risk and customer service departments will have to focus more on fraud trends and foiling specific fraud schemes as there is a bigger group of people operating nefariously in a smaller pool of transactions. Your team’s success metrics will depend on it, as there will be less good traffic to cover up the bad. Ignore the trend and you run the risk of falling afoul the credit card networks fraud and chargeback monitoring programs. Better to share the likelihood of this scenario with senior management ahead of time and be as prepared as possible for negative outcomes, like higher percentage of revenue lost to fraud, increase chargeback ratio and more.
If you need help explaining in understandable terms what is going on in the economy and how your team can provide value to your company, feel free to contact us at Justt. From chargeback trends to eCommerce fraud, we can share with you a valuable perspective on how to approach these issues and insights into coming trends.