Why Luxury Retailers Can't Afford Fraud Prevention That's Only Average

September 24, 2015

The seven largest US luxury retailers spent $71 million collectively last year on holiday ad spending, roughly a quarter of their overall ad budget for the entire year (Schullman Research Center and Kantar Media). Those 7 are: Barneys New York, Bergdorf Goodman, Bloomingdale's, Lord & Taylor, Neiman Marcus, Nordstrom and Saks Fifth Avenue.

That's a huge amount when you think about it collectively, and very significant amounts per company too. For example, Nordstrom and Neiman Marcus both allocate $12 million to their holiday ad budget. Nordstrom actually spent more than half - 59% - of that on digital.

It's no secret that the holiday period is a crucial one for retailers - especially those whose goods make perfect gifts for loved ones.

Unfortunately, these high-end items are popular with another group, too: online criminals.

Why is this?

Fraudsters love luxury goods, because they're expensive, representing a large profit for the thief at the end of the day, and because their popularity means that they're easy to resell quickly. From time to time they might even buy something for themselves, or as a gift. But since they're using stolen card data, the retailer is the one who'll be paying for it in the end.

Fraudsters also like to take advantage of the holiday period, because it's easy to hide among the multitude of genuine shoppers. (Though, oddly enough, they don't take time off over the holiday itself - so the rate of fraudsters shopping online on Christmas Day is higher than usual, since most real buyers are off eating turkey.)

Caught Between a Rock and a Hard Place

As if this weren't bad enough, this trend is actually even more problematic than it appears. Losing money to successful fraud is a serious problem: large retailers reported that this year that fraud as a percentage of revenue increased from 0.85% in 2014 to 1.39% in 2015, an alarming 64% increase.

But what merchants often fail to appreciate fully is the cost of fraud prevention on customer experience.

The method that retailers generally employ to guard against fraud losses is stringent fraud policies. That means shopping becomes slower and less pleasant for buyers - and sometimes even insulting.

Shopping: Slower and Less Pleasant

For almost all retailers, fraud prevention involves a lot of manual review: even among the 25% of merchants using an automated system to flag fraud, three quarters of transactions flagged as fraudulent are ultimately decisioned by human beings.

And manual review is slow. That means:

  • Customers are waiting for confirmation of their orders - and if they wanted those items as gifts in time for the holiday, they're waiting anxiously.
  • Where there's doubt, shoppers might be contacted and annoyed by requests for further identifying information.
  • Customers who thought they had completed their order sometimes find out, days later, that their order was actually rejected after all, and they don't have a gift yet.
  • Fulfillment times are increased, sometimes significantly. It can mean the difference between shipping within hours, or shipping within days.

Ultimately, this all leads to an experience that isn't ideal. And while all retailers want their customers to be happy, this issue is exceptionally important for luxury retailers, because it is so crucial that customers enjoy every aspect of their purchase, for the full luxury experience.

Insulted Customers

Manual review is also not as effective as fraud prevention needs to be for a luxury retailer. In fact, approximately 24% of declined transactions turn out to be false positives - customers who were completely genuine, but were rejected out of an over-abundance of caution.

As you may imagine, consumers insulted in this way tend not to return to try again, something that is especially worrying for luxury retailers who place a high value on lifetime customers.

Holiday Insults

Avoiding false positives is especially difficult over the holiday period, because some of the characteristics that normally signal fraud become perfectly ordinary signs of a last-minute shopper.

For example, fraudsters like to arrange fast delivery, because the faster it happens the less likely it is that the real card owner will find out what's going on. But in the holiday build up, lots of genuine consumers want fast delivery, because they're shopping to a deadline.

Similarly, repeat purchases in a short space of time are often a sign that a fraudster is cashing in while they can - but during the holiday period, it's just as likely to denote a hurried shopper trying to run through their present buying list whenever they have a spare moment.

But, especially for a luxury retailer, refusing the business of a customer who wants to buy many of their products spells disaster; these are the customers merchants want to nurture, not alienate.

The International Angle

All of this is particularly challenging for international retailers, who face a higher rate of fraud attempts. Luxury retailers are bound to fall into this category, because many consumers who love their brands can't find what they want in their own countries, and so order online.

With many luxury brands still feeling their way towards localizing an appropriate experience across the globe, this is a serious issue: the last thing retailers want to do is turn away customers who love their goods enough to go to some lengths to purchase them.

Consumer-Centric Fraud Prevention

Luxury retail is, in general, still in the early stages of adopting and adapting to the opportunities represented by e-commerce. That means that it's absolutely essential to get it right at this stage, and provide an online shopping experience that consumers will rave about.

One thing that will be indispensable in achieving this goal is consumer-centric fraud prevention.

Forter's fraud prevention is built around the principle that fraud prevention should contribute to a company's overall goals, and not hinder them. That means being a part of the ideal customer experience and helping to lift sales, as well as blocking fraud.

Based around machine learning, the system is so accurate that it is able to view customers as 'innocent unless proven guilty' - meaning false positives become a thing of the past.

Moreover, because Forter's system is fully automated, there are no manual reviews. Every single transaction receives an instant approve/decline decision. Genuine customers never even know they were evaluated, while fraudulent ones eventually give up in frustration.

That's the kind of experience luxury retailers want their customers to have. To see how it works in action, read an independent Forrester analysis of the impact of Forter on a luxury retailer.

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