Online Fraud Losses Show Two-Year Drop for Airlines, Survey Says

The world’s airlines are seeing less fraud these days in their online bookings, thanks to more experience with Web-based ticket sales and wider usage of fraud-fighting tools, according to a study released on Wednesday.

Overall, online fraud for air carriers dropped 31%, from $1.7 billion to $1.4 billion, between early 2009 and early 2011, says a survey conducted by CyberSource Corp., a Mountain View, Calif.-based unit of Visa Inc. that provides risk-management services to e-commerce merchants, including about 40 airlines. Carriers responding to the survey, which was conducted between November and January, represented about $62 billion in online sales, or around 40% of all online carrier revenue, CyberSource estimates.

The drop in fraud is signficant, says Doug Schwegman, director of customer and market intelligence for CyberSource. “It’s over two years, but it’s still good progress,” he notes. He credits greater experience with online ticket sales for some of the improvement. Indeed, with some exceptions, airlines with the longest tenure selling from their Web sites have the lowest rate of fraud, according to the survey. While the overall loss rate was 0.9% of sales, carriers with 10 or more years of experience online reported a 0.5% rate. Those with fewer than three years of online experience, by contrast, sustained a 1.7% rate. Still, those with five to six years online did better than those with seven to nine years, with a 0.5% rate compared to 1.3%.

But CyberSource and other providers of risk-management technology acknowledge the battle against airline fraud is far from won, online or offline. “Airlines face a constant battle against a wide variety of fraud including credit card fraud, counterfeit tickets, false baggage claims, frequent-flyer program abuse, internal theft, and agency fraud,” says Jeff Liesendahl, chief executive of Accertify Inc., an Itasca, Ill.-based unit of American Express Co. that automates manual review processes for air carriers and other e-commerce companies. “All of these crimes pose a serious threat.” Liesendahl responded via e-mail to questions from Digital Transactions News.

Interestingly, discount carriers did significantly better than full-fare airlines, posting a 0.4% loss rate compared to 1.2%, according to the CyberSource survey. The difference, says Schwegman, lies mainly in the discount carriers’ slimmer margins, which compel them to keep a closer watch on all expenses, including fraud. “One fraud loss is painful” to the cut-rate airlines, he notes. He adds that fraudsters are more likely to target full-fare carriers, since the value of a fraudulently obtained seat is greater on these planes. “Getting a bargain on Southwest Airlines isn’t quite as nice as getting a bargain on a full-fare airline,” he says.

In general, larger carriers with more resources may be better protected, according to Accertify. “Fraud is still on the rise at smaller carriers that have yet to modernize their fraud-prevention systems,” says Liesendahl. “Fraudsters have migrated to these less-protected carriers because they are much easier targets.”

In a typical scam, a criminal will gull an unsuspecting person with an offer of a heavily discounted ticket, according to CyberSource. He will then use stolen credit card credentials to buy the ticket in the unsuspecting person’s name, at its posted price. He then collects the “discounted” price in cash from the unsuspecting party.

Schwegman also cites a wider variety of anti-fraud methodologies for the improvement in losses. Airlines reported using an average of 7.3 fraud tools, though unsurprisingly those with longer online tenure were using more than those with less experience. Tools with the highest usage included card verification number, negative lists, IP geolocation, and the 3-D Secure online authentication technologies from the card networks, such as Verified by Visa and MasterCard Inc.’s SecureCode.

One intriguing new method, checking social-network sites, was used by 8% of respondents. In this method, personnel conducting manual review of suspect bookings can look up buyers on Facebook or other social media to check for e-mail addresses, home locations, or other information. “We’re finding merchants are starting to go into social-media sites to figure out if it’s a real person or not,” says Schwegman. “You can get more information on who the buyer might be.” Because fraudsters tend to buy tickets online within a day of departure, airlines in particular are under pressure to validate buyers. “You need to make a decision before the plane takes off,” Schwegman says. “Fraudsters take advantage of that.”

On chargebacks, airlines indicated they win on average nearly one-third of those they challenge, with an average net recovery rate of 22% of initial fraud claims.

CyberSource’s “Airline Online Fraud Report,” conducted in association with Airline Information LLC, an organizer of airline-industry conferences, is a separate study from the company’s annual e-commerce fraud report, which conducts research on the fraud experience of e-commerce merchants generally. Some 142 airlines from around the world participated in the survey.