The Green Sheet Online Edition

July 09, 2018 • Issue 18:07:01

Nourish sales and exfoliate fraud: Combatting beauty fraud

By Don Bush
Kount Inc.

When it comes to online fraud, many think high-ticket industries, such as electronics, are most affected by criminal activity. But don't underestimate the price of beauty: double digit growth in the online health and beauty market is attracting the attention of online criminals.

Driving this growth is the recent trend of natural products, which, according to Natural Products Insider, saw a 30 percent increase in sales on Amazon alone in 2016. BigCommerce reported that online sales for the booming cosmetics industry have been rising 17 percent year over year. And the cosmetics industry has experienced an influx of online-only and niche beauty brands that have surged in popularity on social media (thanks, Instagram!). This, combined with consumers' preference for the ease of purchasing their favorite makeup without leaving the house, has left the industry open to fraud.

Industry-specific challenges

Health and beauty businesses face many of the same challenges that other ecommerce operations do: friendly fraud, card-not-present (CNP) fraud, account takeover, and fraudulent account creation, among others. However, they also encounter challenges that are unique to the industry. Some industry-specific issues include:

• Subscription billing: According to Business Insider, 38 percent of U.S. consumers who regularly purchase health and beauty products online utilize subscription billing, which tends to have higher chargeback rates due to friendly fraud and other factors.
• Social buying: While Forbes called Instagram "the world's most powerful selling tool," the dramatic increase in recent years of account takeover crime and fraudulent account creation means higher risk for social selling and buying.
• Commission fraud: As businesses seek more ways to drive revenue, organizations driven by direct sales or affiliate channels face new and unexpected risks, including reliance on antifraud solutions not suited for commission and consultant fraud.
• Omnichannel: Click-and-collect sales are increasingly popular with customers, yet they have higher rates of fraud than card-present or traditional ecommerce sales.

High-impact fraud trends

While merchants in the health and beauty industries might not have prioritized fraud prevention in the past due to the lower cost of merchandise, it's important to realize the true costs involved in CNP fraud, which include the costs of everything from chargeback fees and fines to lost shipping expenses to wasted labor. Following are several fraud trends impacting this industry the most:

• Payment fraud: Multiple sources of fraud can generate chargebacks, including:
1. Criminal fraud: Fraudsters and criminal gangs use stolen credit card accounts to steal high-value health and beauty goods that can be easily converted to cash. For example, a single bottle of perfume or container of supplements can fetch upwards of a hundred dollars or more on resale marketplaces or swap sites.
2. Friendly fraud: Legitimate customers file illegitimate chargebacks instead of requesting exchanges or refunds. For example, a lipstick order is not quite the right color, or charges on a statement aren't recognized, and so a chargeback is filed.
3. Egift card fraud: egift card sales are growing at a 200 percent annual rate and are popular in the health and beauty world because they give recipients freedom of choice. However, egift cards are prime targets for fraud because they're easy to purchase, easy to convert to cash and virtually untraceable.
• Account takeover (ATO): Compromised accounts are sold on the Dark Web or used repeatedly to acquire large quantities of merchandise. The high percentage of subscription accounts within the online health and beauty segment (38 percent) makes ATO a particularly attractive tactic for fraudsters. Fraud software tools are available on the Dark Web to search and combine multiple sources of stolen data to make it easier for criminals to find accounts that can be compromised. Login information is often intercepted through fake sign-up forms or phishing scams. The stolen credentials can then be used to take over accounts across multiple sites since consumers often re-use usernames and passwords.
• Mobile fraud: Mobile commerce continues to soar, accounting for more than 23 percent of online revenue in the third quarter of 2017. However, at the same time mobile commerce is taking off, so is mobile fraud: According to Website Magazine, 60 percent of overall fraud originates on mobile devices. The mobile channel brings special challenges when it comes to fraud prevention. The nature of wireless networks makes it easier for fraudsters to mask their true identities, which opens greater vulnerabilities and means increased costs online for health and beauty businesses.
• Click-and-collect fraud: Retail TouchPoints reported that nearly half (44 percent) of U.S. consumers want the option to collect their purchases at a physical store immediately after purchasing online. As brick-and-mortar health and beauty retailers have moved to offer this popular service, fraudsters have followed the money. In order to avoid detection, these crime rings deploy gangs of low-level "mules" to visit stores to pick up multiple, fraudulent click-and-collect orders. The combination of compressed time frame, mobile device ordering, and reduced data for screening (for example, masked IP address, no delivery address, etc.) makes click-and-collect fraud harder to detect.
• Direct sales and multilevel marketing (MLM): The health and beauty market has a substantial percentage of orders that take place in the direct sales/MLM channels, creating unique issues. Most antifraud systems lack the flexibility to adapt to the unique requirements of the direct sales model. Behavior that in a conventional ecommerce setting looks fraudulent (for example, multiple orders placed from one device using multiple credit cards) is often typical in the direct sales channel. The result can be unnecessary false positives. In addition, fraudsters posing as new consultants can place hundreds of fraudulent orders with stolen credit cards, collect commissions, steal merchandise and disappear.
• False positives: A false positive (or a false decline) is when a merchant declines a legitimate but suspicious-looking order due to fear of fraud. Customers who are wrongly rejected will often stop buying from the business that turns them away. In today's connected world of social media and viral posts, one shopper's experience with a false positive can suddenly reach thousands and thousands of customers and potential customers, having a much larger impact than a single lost sale.

Don't let the threat of fraud slow your business down. You can help your merchant customers get the right precautions and fraud prevention systems in place, so they (and you) can capitalize on the increase in beauty business without letting fraud get in the way.

Don Bush joined Kount as Director of Marketing in October 2010 and became Vice President of Marketing in December 2012. Previously, he was Director of Marketing at CradlePoint, a leading manufacturer of wireless routing solutions in the mobile broadband industry. Don has worked in several management roles within the technology segment for over 20 years with both hardware/software manufacturers and as a partner in two top technology marketing agencies. He has led products launches and marketing programs for dozens of companies around the world such as Citi, HP, IBM, Kodak, Motorola and Weyerhaeuser, and he co-authored the seminar series, Common Launch Disasters and How to Avoid Them. Contact Don at don.bush@kount.com or visit ,a href='http://www.kount.com' target="blank">www.kount.com.

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