Web retailers accepting international orders find a variety of ways to limit their risk.
Zak Stambor , Managing Editor
Fraud took off almost immediately after health supplements retailer HealthDesigns.com began selling to U.K., Canadian and Australian shoppers in spring 2011. But within a year the e-retailer was able to bring it under control.
When it began accepting international orders, the retailer was using Chase Paymentech's Address Verification Service to determine whether a shopper's billing address matched, or partially matched, the address in his payment card file. But the tool doesn't work for non-U.S. addresses, which rendered it useless for foreign orders. The retailer could still manually review orders—its order management system automatically flags orders that exceed a preset amount and those with different shipping and billing addresses—but that process is labor-intensive, says Nicholas Schneider, operations manager of HDI Commerce, which operates HealthDesigns.com.
The time involved in manually reviewing orders quickly became an issue because the retailer's international marketing efforts—largely via social media—worked. International orders streamed in, especially when the retailer expanded into sports supplements like whey protein powder.
While the boost in sales was welcome news, HealthDesigns.com's system couldn't keep pace and the retailer's fraud rates soared, Schneider says. Before the retailer implemented Kount Inc.'s fraud prevention service in early 2012, its chargeback rate reached 1.795%. Fraud was costing the retailer up to $15,000 a month. Fraud triggers chargebacks when the legitimate consumer whose credit card number has been used to make the purchase complains to his card-issuing bank, which then retrieves the money from the merchant via a chargeback.
HealthDesigns.com's situation was not unique. Accepting orders from international customers can boost sales, but it often leads to higher fraud losses. International orders comprise 14% of all e-commerce orders among North American retailers, according to payment processing and risk management services vendor CyberSource Corp.'s 2013 Online Fraud Report. But the fraud rate on international orders is 1.6% of the dollar value of those orders, double the domestic e-commerce fraud rate of 0.8%.
That means retailers who want to reap the rewards of selling internationally have to figure out how to mitigate the risk. And what works for one retailer might not be a good fit for another.
Before it began selling internationally, HealthDesigns.com's fraud rate was close enough to zero that it could rely on its two-pronged system of verifying addresses and manually reviewing large orders, says Schneider. But after the launch of international selling caused its fraud rate to spike the retailer reached out to Kount.
It took Kount about five weeks to integrate its fraud prevention software into HealthDesigns.com's Magento Enterprise e-commerce platform. Kount flags suspicious transactions in several ways, including device fingerprinting, which uses data to identify individual PCs, phones or tablets to verify a shopper's identity.
The vendor provides data about each suspicious order, for example, the shopper's location in a country notorious for fraud, to help HealthDesigns.com decide whether to process an order. The system also makes it simple to tweak the system's rules, Schneider says. The retailer holds a weekly meeting where staffers examine the Kount data and discuss how to address any issues. The e-retailer then adjusts its rules accordingly.
Kount has helped HealthDesigns.com drop its chargeback rate from 1.795% to 0.195%. That's reduced its monthly chargeback costs from up to $15,000 a month to less than $1,000, Schneider says. Those savings have more than paid for the roughly $10,000 setup costs Kount charged HealthDesigns.com. Schneider says he also pays Kount less than a penny per transaction on all transactions. Kount declined to disclose its rates.
Having Kount's fraud prevention tools has helped HealthDesigns.com lessen the risks involved in selling to international shoppers. Those international sales are extremely lucrative, Schneider says. While he declines to provide sales figures, he says international orders are the fastest-growing segment of HealthDesigns.com's business.
Another e-retailer adapting its security—and other—procedures in response to international sales is Ritani, an online jewelry seller that launched last October. The e-retailer hadn't planned to sell outside the United States, but almost immediately after the launch of its e-commerce site Ritani began receiving inquiries from international shoppers looking to buy.
There were too many inquiries to ignore, says Kevin Flaherty, the retailer's vice president of marketing. But when it tried to handle international orders, the retailer encountered obstacles. "It is super-complicated to ship jewelryÑand diamonds in particularÑacross borders," he says. "There are all sorts of taxes, tariffs and shipping issues to figure out."
It turned to a vendor, FiftyOne Global Ecommerce, which recently changed its name to Borderfree, to handle the logistics of shipping jewelry abroad, and it developed a largely manual fraud prevention strategy on its own. Ritani in March began selling in 12 countries, including Canada, Japan and Switzerland.
The retailer's fulfillment process is largely automated. It uses a shopper's IP address to identify his location, and the Borderfree system converts the site's prices into a shopper's local currency. The system also factors in any additional taxes or tariffs when the shopper checks out.
However, both because of its limited budget and the nature of its business, the retailer's fraud prevention approach is not automated. After an international customer places an order, a customer service agent e-mails the shopper, asking for a reply, or calls. After an agent interacts with the shopper and "feels her out," it processes the order. With an average ticket of more than $5,000, the retailer can afford to take that approach, he says. Its method means agents have to be sensitive to cultural and language differences. But since the shopper is buying on an English-language site, that hasn't proven to be too much of an issue, he says.
"We don't rely on an algorithm to ensure that we're sending an order to a legitimate customer," he says. "Most people don't buy a $5,000 ring every day, so they're generally OK with more interactions with us. And that helps keep some criminals away because people trying to commit fraud don't want to jump through hoops."
While it is too early for Ritani to conclusively comment on its international fraud rate, early results show the fraud rate on international orders is in line with the domestic rate, Flaherty says. International orders make up about 10% of the retailer's business, and they can be more profitable. While large online retailers compete aggressively for keywords in the United States, there's less competition abroad, he says. As a result, similar keywords are 10% to 50% cheaper, he says, which means it often costs less to acquire new customers from other countries.
E-retailer US Markerboard also relies on a largely manual fraud prevention system, but backs it with an insurance policy that limits its fraud losses.
The online-only school, home and office supplies retailer began selling in Canada four years ago and it has since expanded into the United Kingdom and Australia.
While those three countries have much in common with the United States, the fraud rate on those international orders of slightly less than 1% is double the e-retailer's domestic fraud rate, says president and CEO Scott Newman. However, it is still low enough that Newman doesn't feel the need to invest in a fraud prevention vendor or service.
Instead, every day two employees review the previous day's orders and attempted orders. They look for instances of an individual trying to purchase with a single payment card but with different expiration dates or security codes, for disparities between shipping and billing addresses, and a number of other signs of potential fraud. If something seems askew, it pulls the order and does its "due diligence," including contacting the credit card company to see if other retailers have flagged the card for suspicious activity, Newman says.
Unlike Ritani, however, US Markerboard has a backup in case a fraudulent order gets through. The retailer has a cyber-liability insurance policy from Continental Casualty Co. The policy, which has a $500 deductible, covers the retailer's costs in the case of fraud, security breaches and other criminal activities.
Because of the deductible, the policy might not work for some retailers, but for US Markerboard, which occasionally has orders that total several thousand dollars, it helps lessen its risk. "You still have to do your due diligence to make sure an order is legitimate," Newman says.
The insurance helped US Markerboard recoup its losses when criminals made a "sizable" order and paid with a fraudulent Canadian prepaid cashier's check. And, because US Markerboard's manual system generally works, the insurance is an ideal safeguard for its business, Newman says. He declined to share the policy's cost.
Criminals are constantly adapting their techniques to find retailers' potential vulnerabilities. And when retailers open up to international orders, they're exposing themselves to a larger swath of criminals and often have less effective tools available for deterring fraud. To fight back, each e-retailer has to figure out what works for its business and budget, and whether the incremental sales will offset the added costs and risks.