Bonsai plant retailer Stilyo in November 2016 received its largest order to date: 100 levitating air-floating bonsai pots that totaled $17,499.

Because the 2-year-old retailer had never experienced any significant issues with fraud, it shipped the order without conducting any background checks says CEO Eric Haim. That was a mistake: Stilyo received a chargeback from the purchaser’s credit card a few days after the package was delivered.

“The money was gone,” Haim says. “As a new business owner, we didn’t have any spare money and the business took a huge hit.” The situation drove Haim to buy fraud-prevention software and put processes in place to avoid falling prey to criminals.

This is a lesson online retailers often learn the hard way. And the problem is getting worse. Fraud is up 40% this year among retailers with at least $10 million in annual online sales, according to the annual “LexisNexis Risk Solutions 2019 True Cost of Fraud Study.” The report is based on a survey of 700 U.S. risk and fraud executives in retail and commerce.

There are multiple reasons behind the rise in fraudulent transactions, including a slew of data breaches that make stolen customer information available, as well as criminals who are frequently changing their tactics. The situation is driving many retailers to take a multipronged approach to keep fraud at bay that includes using software and fraud prevention vendors’ technology and updating their business policies and procedures.

 

Stilyo began working with fraud prevention service NoFraud in the first quarter of 2017. The vendor uses a set of rules to flag potential fraud. For example, NoFraud’s system will investigate a shopper who required multiple attempts to enter her credit card information or tried multiple card numbers.

NoFraud takes a 0.4% cut of Stilyo’s orders that it evaluates, and it provides insurance on orders that are less than $1,000. Stilyo evaluates the small number of orders that exceed $1,000 on its own. It requires those shoppers to authenticate their purchases to upload a picture of themselves with a government-issued ID, credit card and some indicator of the date, such as a newspaper. They can cover up the first few digits on the credit card in the photo, Haim says. Stilyo’s staff then evaluates the images to ensure the customers are who they say they are.

Roughly 25 orders per year require that additional layer, he says. Most shoppers with larger orders will authenticate with a photo or will call into customer service for help or to ask questions, such as why it is necessary. While some have abandoned the order after this pop-up window, that’s OK with Haim because that suggests they may have attempting to place a fraudulent order.

 

A majority of shoppers understand they may have to verify their identity when they shop online, according to a 2019 Internet Retailer and Bizrate Insights survey of 1,110 online shoppers. 69% of shoppers have never had a problem typing in an identity code a retailer has sent them, although 5% of shoppers find the process frustrating and 2% abandon their purchase rather than enter the code. (The remaining shoppers selected another response.)

Similarly, 79% of shoppers understand that retailers are trying to prevent fraud when a retailer asks them a security question, according to that same survey. 16% of consumers find security questions annoying and 5% often leave the site when presented with a security question. (The remaining shoppers selected another response.)

NoFraud’s fraud-prevention software has helped Stilyo keep fraudulent transactions in line with its sales, Haim says. Stilyo’s online order volume increased 54% year over year in 2018, and the number of its fraudulent orders grew about 57%, he says.

Haim doesn’t expect to see any surges in fraud in the near future, as long as the software keeps pace with criminals and adapts its tactics as the criminals do. But that isn’t easy. Criminals are on a relentless quest to deploy new tactics to steal identities and con retailers.

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