As Merchants Add Digital Goods, They Must Adapt Their Anti-Fraud Efforts, Expert Warns

Digital goods have matured way past ringtones for a mobile phone. And with that, merchants need to adapt their anti-fraud measures, suggests LexisNexis, a Dayton, Ohio-based risk-services company.

Today’s consumers are completely comfortable buying books, movies, and apps for the smart phones, tablets, and computers, Aaron Press, LexisNexis Risk Solutions director of retail, e-commerce, and payments, tells Digital Transactions News.

With that comfort comes more sales—and more fraud, he says. “Fraud in general spikes around this time of year,” Press says. That’s because many online retailers relax their fraud-prevention measures a little to ensure they get as many legitimate sales as possible that otherwise might be flagged as potentially fraudulent. Criminals know that, and increase their efforts, too. Digital goods, especially digital gift cards, are integral to the holiday shopping season.

Indeed, closed-loop digital gift card sales for November and December are projected to be between $2.5 billion and $3 billion, according to Mercator Advisory Group, a payments consulting firm. That’s about double the projection Mercator made last year.

Many merchants use services that assign a risk score to transactions that factors in device fingerprinting, ticket size, frequency of purchase with a particular credit or debit card, and other attributes. The merchant chooses the threshold dividing those transactions that automatically are allowed to proceed from those that need to be reviewed.

Because of the almost instant delivery of a digital good, online retailers often can’t have the same fraud-protection measures, relaxed or not, that they have in place for physical goods, Press says. “The delivery is one of the key ways the card-not-present merchant has a chance to establish some identity or do some additional checking, such as looking at any differences between the shipping and billing addresses,” he says.

And mobile transactions compound the issue for merchants. While merchants may be able to use technology that locates a fixed computer’s location using its Internet protocol address to determine if a known customer is making a purchase—known as device fingerprinting— they may not be able to do so with smart phones and tablets on mobile networks. “They don’t necessarily ride the same IP networks,” Press says, making such fingerprinting tactics unusable many times.

Given the consumer’s expectation of an instantaneous download, merchants have little time to conduct other checks, he says.

One tactic that merchants might use that could help is enabling a digital wallet, Press says. “Anything that requires a deeper level of authentication upfront is certainly a good thing for merchants,” he says. The due diligence to verify the digital-wallet user’s identity and payment method has the potential to alleviate some of the risk, Press says.

Another measure retailers can take is to adopt their holiday-shopping fraud-prevention measures earlier in the fourth quarter, Press says. “One thing we’ve seen is as the holiday-shopping season, particularly in e-commerce, gets earlier and earlier, we recommend retailers get into their holiday-fraud posture earlier,” he says.

The expansion of holiday shopping means the potential for more chargebacks, Press says. Chargebacks, particularly in coming years if the holiday-shopping season continues to expand, may begin to show up sooner than the current mid-January timeframe, he says. That could present a challenge for already stressed teams. “Your finance team may not be thinking about chargeback defense in the middle of the busiest shopping season,” notes Press.