NEWS

Retail Decisions’ CEO Carl Clump has the cure for what ails retailers when it comes to fraud.

Fraud is one of the biggest thorns in the side of any retailer. It not only raises the cost of doing business, but it also increases the price of goods to consumers and erodes consumer confidence in the e-retail channel. The latter is a major issue because millions of consumers are reluctant to shop online for fear of security breaches.

Complicating the fraud picture for e-retailers is the fact that fraud is no longer confined to credit card transactions. Gift cards and e-checks are also vulnerable as criminals are constantly searching for ways to defraud e-retailers using the alternative payment methods retailers are embracing to hold down the costs of accepting payments. Unfortunately for e-retailers, criminals are enjoying great success from these efforts.

“Fraud is an organized crime and when criminals see holes they can exploit in a retailer’s system, they will,” says Carl Clump, CEO of Retail Decisions, which provides fraud prevention, payments processing, and card issuing services to retailers. “In many cases, fraud is a way to quickly get products that can easily be resold to fund other criminal activities.”

Clump gained his knowledge of payments fraud during more than two decades managing credit card portfolios and heading transaction processors. During his 13 years at Texaco, which included responsibility for the oil giant’s credit card portfolios in Europe, Clump gathered insights into fraud prevention and detection on both the card issuing and merchant acquiring sides of the business.

His next stops as president and director general of TEPAR, a consortium of European card issuing companies, and then as group managing director of The Harpur Group Ltd., an international processor and issuer of corporate credit cards, furthered his understanding of payments fraud and how retailers can combat it.

Providing the big picture
One of the chief lessons Clump learned was that while retailers understand the importance of expanding payments acceptance, their knowledge of fraud detection and prevention is not as great because they are immersed in marketing and merchandising issues. In addition, they usually have only their own fraud experience to draw on and that presents only a tiny slice of the fraud picture.

“Retailers are aware of the threat fraud poses to their business but they tend to operate in isolation when it comes to fraud because they rarely cooperate with each other and they are not fraud prevention experts,” Clump says.

A common mistake made by retailers is that they install home-grown fraud prevention solutions or purchase fraud detection applications on the cheap that do not evolve to stay ahead of the techniques criminals use.

As fraud volumes rise, retailers will often compensate by putting in stricter rules around transaction authentication. And that’s a mistake as many retailers end up rejecting as much as 8% of transactions as fraudulent when in reality only 1% to 2% are actually illegitimate. “That means 6% of overall transactions that are actually good are turned away,” adds Clump.

Avoiding this pitfall is especially critical to retailers as they enter the holiday shopping season, the time of the year they generate their highest transaction volumes and are most vulnerable to fraud. “When there are high volumes of transactions, criminals committing retail fraud feel their activity will be camouflaged by the larger population of transactions,” Clump explains. “Retailers need to avoid the temptation of putting in draconian rules to prevent fraud as this will adversely impact their bottom line by denying many good customers the opportunity to purchase. Those good customers will go elsewhere, never to return. There are many clues to identify fraud that need to be understood in order to have a sophisticated fraud prevention solution.”

Watch those e-mail addresses
Among those clues are the use of free e-mail addresses by the customer, purchase of goods and services that ship within 24 hours and purchases significantly higher than the retailer’s average. Criminals also like to ship items to major states. About 51% of all fraudulent purchases are shipped to California, New York, Florida, Texas or New Jersey, according to Clump.

Other indicators include the type of products purchased. Digital cameras are highly popular among criminals, including the Nikon 8 CoolPix 8800 and the Canon 3.2 Powershot A 75. Samsung mobile phones, Toshiba laptop computers, iPods and computer memory cards are always popular. Team merchandise from the Boston Red Sox and New York Yankees is another primary target.

The 2006 holiday shopping season also showed a major run on last-minute gift items, a hot new category for e-retailers designed to service the late shopper. Items in this category included Moet & Chandon Brut champagne and the Star Wars Mr. Potato Head, a must-have item on many children’s Christmas lists.

“These are desirable items that can be quickly resold and converted into cash,” Clump says. “Last minute gifts or purchases made with next day or less than average shipping periods don’t give e-retailers with inferior fraud prevention services time to catch every fraudulent transaction. E-retailers can also let their guard down on fraud detection in their desire to complete as many last minute sales as possible.”

Nor do criminals take a break on Christmas. Fraud peaked between 2 p.m. and 3 p.m. on Christmas 2006. Other trends included 62% of fraud on Christmas originating from IP addresses outside the United States, compared to 39% on a normal day. Ghana proved to be the launching pad for 15%, or one in seven, of the day’s fraudulent transactions.

“Retailers need to understand all the patterns behind fraud and that is not easy to do when they have no access to fraud data outside their own business,” says Clump. “Our data comes from not only all retailer channels, but telecoms and travel companies as well on an international basis.”

The growing gift card menace
One of the fastest growing, and most difficult forms of fraud to detect, is gift card fraud. As more retailers offer gift cards, criminals are actively targeting these products because they know few fraud prevention applications are built for gift card transactions.

During the 2006 holiday shopping season, 27% of attempted gift card transactions were fraudulent, according to Clump. “Criminals are able to get hold of the algorithms for gift card approvals and use them to load value on actual and virtual cards,” Clump says. “The gift card has become extremely prone to fraud and it is a product we have included in our fraud detection applications because we issue them for retailers.”

To stay ahead of the methods criminals use to perpetrate fraud, Retail Decisions has incorporated neural technology into its ReD Shield application. ReD Shield examines merchant-specific transaction velocity to provide a real-time risk assessment recommendation of each transaction. The neural technology used in ReD Shield is based on Retail Decisions, ReD PRISM neural technology, which was developed by Nobel Prize-winning scientists and is used by several banks and credit card issuers globally.

Looking ahead to the 2007 holiday shopping season, Clumps says retailers must take steps now to implement fraud detection tools before they become too immersed in holiday sales, as criminals will be unveiling more sophisticated methods for defrauding them.

“Retailers owe it to their customers to control fraud so they can keep their operating costs down, which keeps prices lower,” Clump says. “Controlling fraud also eases consumers’ fears about the perceived risks of shopping online. Allowing those fears to flourish will keep customers on the sidelines.”

And that is something retailers can’t afford.