Fraud In

Online Fashion
A Special Report for eCommerce Merchants

2016
Introduction
2015 was a banner year for eCommerce, and global online purchases are
projected to more than double to $3.5 trillion by 2019. With no signs of
eCommerce growth slowing down anytime soon, fashion merchants are
particularly well-positioned to ride the wave to a dramatic increase in revenues.
It is estimated that global eCommerce sales in the fashion vertical amounted
to approximately $85 billion in 2015. Double digit growth between now and
2020 is predicted to push online fashion sales revenues higher with every
passing year.

Fashion merchants stand to benefit not only from domestic shopping but
also from cross-border eCommerce, as consumers from emerging markets
like China increasingly take their new wealth and interest in fashion to global
websites. Fashion is the most popular product category for online cross-border
shopping, with 61% of cross-border online shoppers having made a clothing
purchase in the last year.

t
Fashion is the most popular produc
shopping
category for online cross-border

But unfortunately, as the eCommerce market grows - so does fraud.

Identifying and preventing card-not-present (CNP) fraud is challenging for
merchants across verticals. Rapidly changing fraud patterns and fraudster
methods mean eCommerce merchants must try to hit a moving target, adding
another layer of complexity to accurate fraud prevention. Fashion merchants
face unique fraud management challenges, such as contending with the
fluctuations in both legitimate and fraudulent buying patterns caused by ever
changing fashion trends. Throw the seasonal sales cycles that cause dramatic
swings in order volumes throughout the year into the mix, and you can see why
a proper fraud prevention strategy requires a complex, multi-faceted approach.

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Despite the challenges, it is imperative that executives in online fashion companies
work to ensure fraud prevention measures do not hold their business back
from achieving revenue goals and penetrating new markets. For example, while
consumer validation measures need to be effective, they must not be allowed to
add friction to the shopping experience. Similarly, while avoiding chargebacks is
important, fraud prevention measures that cause merchants to decline legitimate
orders along with fraud result in customer insult and lead to significant losses.

Striking the proper balance between these considerations is especially

important for merchants looking to grow their international customer base and
capitalize on the estimated $1 trillion global cross-border eCommerce market
expected to exist by 2020. Whether you plan to start shipping internationally,
or simply want to start accepting international payment methods, it is important
to update fraud management systems and processes to properly handle cross-
border transactions.

Executives must work to ensure fraud prev

ention
measures do not hold their business back from
achieving revenue goals and penetrating new
markets

Riskified has been fortunate to partner with some outstanding fashion brands,
such as FarFetch, SSense, and Vestiaire Collective. This report contains insights
from our work with dozens of merchants in the fashion vertical - including both
consumer fashion and luxury fashion sites.

Sharing information about fraudster methodology and collaborating on best

practices for managing card-not-present (CNP) transactions is an important
way for merchants to protect themselves. Therefore, in presenting the data we
explain the rationale behind the conclusions we’ve drawn, and also discuss
how merchants can improve their own fraud prevention operations.

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 Vast Majority of Online
Fashion Orders are Valid
Fashion Merchants Should Approve
at least 90% of Online Orders
4.81%
Since fraud hits nearly every online retailer, its
prevalence is often overestimated.
We analyzed Riskified’s data to evaluate 2.00%

the “fraud rate” - meaning the percentage

of fraud-related declined transactions and consumer luxury
chargebacks out of total order volume - in the fashion fashion
online fashion vertical.

The data shows that in both consumer

fashion and luxury fashion online sales the
fraud rate is below 5%. Although the rate
of fraud in luxury fashion orders is more
than double than in consumer fashion,
Riskified still approves over 97% of consumer
fashion orders and nearly 90% of luxury
fashion orders.

This means that any fashion merchant that

is rejecting over 10% of all incoming orders
is almost certainly turning away good
customers along with the bad.

The cost of such mistakes cannot be Both consumer and luxury

understated. A recent study by Javelin fashion merchants should
be accepting a minimum
Strategy showed that a staggering 42% of
“millennials” abandoned a merchant after of 9 out of 10 orders.
experiencing a false decline, and 58% of
high-income cardholders limited or stopped
shopping with a merchant who wrongly
declined their order. In other words, fashion
merchants who implement stringent fraud
prevention measures to avoid chargebacks
might end up doing more harm than good to
their revenue.

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Fraud Rates Vary Depending on the Product Purchased

Fashion merchants sell a diverse range of clothing, accessories, and footwear,

and each of these unique categories comprises several different product
types. Understanding the shopping patterns and fraud rates associated with
every product category can help fashion merchants to optimize their fraud
prevention strategy.

This visual is based on Riskified’s aggregate data from eCommerce merchants

in the fashion vertical. Of the items purchased from consumer fashion
merchants, watches, sneakers and jeans have the highest rate of fraud. On the
other end of the spectrum, the “safest” fashion items, meaning those that are
less likely to be targeted by fraudsters, are underwear & swimwear, jewelry, and
shoes.

Watches 9.92%

Sneakers 5.76%

Jeans 3.20%

Bags 2.37%

Coats 2.15%

Sunglasses 1.92% Online F

ashion P
Categor roduct
ies & Fra
Shoes 1.34% ud Rates

Jewelry 1.09%

Underwear 0.98%

Because fashion merchants do not categorize their products in a uniform

way, and since every site carries different brands, we advise against relying
on aggregate data to inform fraud management efforts. Instead, we highly
recommend that every fashion merchant collect and track this data internally in
order to boost their fraud management efficiency.

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Statistical Data is Only Valuable if Used Intelligently

Understanding the characteristics of legitimate eCommerce orders is essential

to increasing online sales revenue and avoiding false positive declines. It
is tempting to try and rely on statistical data to create clear rules that would
simplify the fraud review process.

However, since online fraud is a complex problem that evolves constantly,

it requires an adaptive solution. Even the most carefully crafted fraud
management rules can lead to major, yet entirely avoidable, mistakes. In
other words, statistical data is only valuable if it is used intelligently and if it is
continuously collected and analyzed.

49.55%

In Luxury Fashio
n, More
Items in Cart = M
ore Fraud

14.22%
10.53% 10.42%
5.66%
4.31%
1 E F G H I>

For example, the visual above shows the correlation between fraud rates and
the number of items in the shopping cart. In online consumer fashion sales, the
rate of fraud remains more or less constant regardless of the number of items
in the cart. However, when considering luxury fashion orders, a clear pattern
emerges - the fraud rate is higher in orders with more items. Luxury fashion
orders with 6 or more items are more than 10x likelier to be fraudulent than
purchases of a single luxury fashion item.

While there is clearly a correlation between the amount of items included in

the order and the risk of fraud, it is important to note that the relationship is
not linear. For example, while luxury fashion orders with two items in the cart
are 1.3x riskier than single item orders, luxury fashion orders with 5 items are
actually less risky than orders with 4 items. Assigning a linear risk relationship
to increases in the size of shopping carts would be a costly mistake. Indeed,

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one of the pitfalls of relying on statistical data for fraud prevention purposes
is that it’s all too easy to draw conclusions that go beyond what the numbers
actually support.

Fraudste
rs Care
About F
ashion
Fraud Rates Vary by Sneaker Brand
Trends

Another potential pitfall of relying on non-dynamic

statistical data to inform fraud management
systems is that fraudster behavior, and therefore
fraud patterns, change over time. The visual on
the left is based on Riskified’s data regarding fraud
rates across various sneaker brands.
Nike LeBron
42.62%
Clearly, not all sneaker brands are equally targeted
by fraudsters. In fact, the data seems to suggest
Timberland
39.90%
that trendy sneakers, which have a broader
fashion appeal, are more likely to be targeted by
Supra
22.64%
fraudsters than sneakers designed for a specific
purpose (e.g. running).
Toms
16.44%
Fashion merchants can definitely use data of this
Jordan kind to inform fraud management measures, but
14.74%
they must also keep in mind that by definition,
Reebok
fashion trends change. Basing fraud management
13.16%
measures on data that reflects a snapshot in
Converse
time will result in a disconnect between one’s
9.73%
assumptions and reality. To handle evolving fraud
Asics
patterns, online fashion merchants need to be able
8.60%
to adapt their fraud management operations in
Saucony
real-time.
5.17%

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Don’t Miss Out on the Opportunities of
Cross-Border eCommerce

The global market value of cross-border eCommerce sales in 2015

was estimated to be more than $1 trillion. According to a report by PFSweb,
2015 saw 35% of consumers shop on sites outside of their home country, and
nearly 25% of all global eCommerce sales were made by shoppers purchasing
on a website outside of their home country. Of particular interest to US
merchants is that in 2015 approximately 50% of all the eCommerce purchases
made by shoppers on a website outside of their home country were made on
US sites.

Despite the huge opportunity, many online businesses are not effectively
managing cross-border transactions. Often, merchants’ fraud prevention
systems are not properly set up to handle international orders, and all orders
with missing AVS data or with billing-shipping address mismatches are filtered
or flagged for manual review. In other cases, merchants simply do not accept
international payment methods. Either way, the result is the same - merchants
end up either significantly curtailing their international presence or not selling to
international customers at all.

in 2015 approximately 50% of all the eComme

rce
purchases made by shoppers on a website
outside
of their home country were made on US sites

For merchants, the key to maximizing revenue from cross-border eCommerce

is to understand the reasons legitimate consumers purchase from international
sites or use reshipping services and to then distinguish them from the methods
of operation used by fraudsters. This is especially crucial for US fashion
merchants because clothing and accessories account for 31% of all products
purchased by international shoppers on US websites .

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 Context is Key to Accurate Fraud Detection

We analyzed our data for cross-border orders placed with US consumer fashion
merchants in order to uncover legitimate cross-border shopping patterns.
Specifically, the visual below shows countries with the lowest fraud rates for
fashion orders placed with an international card and a US shipping address:
USA

the
Don’t Miss Out on
Opportunity of
0.0% ommerce
Cross-border eC

0.8%
Bahamas 1.0%

0.0%
0.0%

Dominican Puerto
Republic Rico

Jamaica
Barbados

What the countries above have in common is that residents there have good
reasons to purchase from US sites and to ship the goods to the US (using US-
based reshippers or simply shipping goods to the homes of friends and family
in the US and picking them up during visits there). This is true even for countries
that might be considered “risky” due to high levels of poverty such as the
Dominican Republic (1.0%), or Puerto Rico (0.8%). In fact, for some island nations
reliant on US reshippers, such as Jamaica, Barbados, and the Bahamas, the
fraud rate is actually zero.

The data shows us that a merchant who enforces a blanket prohibition on

orders paid for with international cards is pursuing a fraud prevention strategy
contrary to the empirical realities. This is just one example of the potentially
disastrous consequences of grafting static assumptions onto a fraud prevention
strategy. Instead, merchants should try to identify where their consumers are
coming from and what the patterns that indicate legitimate orders for their
business are. That will allow them to accept as many legitimate orders as
possible and be sure they aren’t leaving money on the table.

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Chinese Cross-Border Fashion Purchases

Fashion merchants have a lot to gain from cross-border consumers, and the
Chinese market is especially important in this respect. In 2015, nearly 1/3 of
online shoppers in China made a purchase from a foreign website, and 84%
of Chinese consumers who made online cross-border purchases reported
that their purchases were primarily from US merchants. As the buying power
of Chinese consumers continues to grow, more and more of them are making
purchases within the fashion vertical. In 2015, 43% of Chinese cross-border
shoppers purchased apparel & accessories.

Perhaps the most encouraging information for online fashion merchants is that
regardless of how you parse the data, it’s clear that cross-border fashion orders
placed with Chinese credit cards are relatively safe.

The visual below shows that the fraud rate for orders paid for with Chinese
credit cards for shipping outside of China hovers at around 3.5%. We see that
luxury fashion orders placed with Chinese credit cards and shipped to the US
are safest (1.04%), and orders paid for with a Chinese credit card and placed for
any non-Chinese shipping destination is slightly riskier (1.58%).

e of
A d vantag er 6.06%
Ta k e
B u y in g Po w
se
Chine

3.58%

1.58%
1.04%

= US = China = US = China

Luxury Fashion Consumer Fashion

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In a 2015 poll, 77% of Chinese respondents cited the need for goods not
available in China as their top reason for cross-border shopping. Other
legitimate reasons for Chinese credit cards being used to place online orders
for shipments outside of China can include people on vacation, students at
college, or business executives working abroad.

We also looked at the data of Chinese purchases specifically made from US

fashion merchants with a US shipping address. Here, what we found is that on
the whole, luxury fashion orders from China are actually safer than consumer
fashion orders. This reinforces the importance of US based merchants being
open to cross-border commerce from China. Luxury fashion merchants
especially are losing significant revenues if they are declining too many orders
placed with Chinese cards.

The major insight the data provides is that turning away orders placed with a
Chinese credit card can cost a business in the fashion vertical a lot of revenue.
Merchants should be willing to accept both luxury and consumer fashion orders
paid for with Chinese credit cards for shipment to non-Chinese addresses (US
or otherwise) unless there is a very compelling reason not to.

Luxury brands especially should be opening themselves to the Chinese market.

But even retail fashion merchants - who have more reason to be wary - should
be aware that the vast majority of cross-border orders purchased with Chinese
cards are legitimate.

Luxury fashion sites especially should be

opening themselves to the Chinese market

In other words, familiarity with “good” shopping patterns is essential to ensuring

you are able to grow your international customer base. Declining all orders
place with a Chinese credit card simply because you are unfamiliar with the
Chinese market would be a very costly mistake.

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The Holiday Season is More Dangerous Safer

Top shopping days like Black Friday and Cyber Monday present an opportunity
for eCommerce merchants to generate a substantial percent of their annual
revenue. However, as the holidays approach, consumers and merchants
alike are bombarded with media reports and projections about an expected
increase in fraud during the holiday sales. The idea that the holidays are a
high-risk period is perpetrated by fraud prevention solution providers looking to
capitalize on a climate of fear.

BLACK FRIDAY &

AVERAGE DAY
wer
CYBER MONDAY
re Actually Lo
Fraud Rates a onday
ay & Cyber M
on Black Frid
0.60% 2.21%
fraud rate fraud rate

The reality is that the number of fraudsters does not suddenly increase come
November. What does increase is the number of legitimate shoppers looking
to make purchases online. Online fashion sales volumes nearly doubled
the number of fraudulent purchases remains constant while overall order
volume increases. The result is that fraudulent orders actually decrease as a
percentage of total order volume during the holiday season.

Online fashion sales volumes nearly doubled during the 2014 holiday season,
accompanied by an increase of over 20% in the average order value. However,
fraud rates during the holiday season were lower than the monthly average.
December especially bore out the reality of fraudulent orders being diluted
by a deluge of legitimate ones - with a fraud rate significantly lower than an
average month.

During the height of the holiday sales season, the influx of large amounts of
legitimate orders can also overwhelm fraud prevention measures that are
perfectly adequate during the rest of the year. When this happens less time is
spent reviewing each order, and so the tendency is for the risk threshold

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merchants use to trigger a decline to get lower and lower. The ultimate
result is that merchants end up declining far too many good orders from
legitimate customers.

&
BLACK FRIDAY
AY
CYBER MOND AVERAGE DA
Y

False Declines increase on

ery
Black Friday & Cyber Monday 3 out of ev 2 out of every
are
4 declines 4 declines are
pooval raetes
e pr
falsap s it iv
false positives
approval rate

On Black Friday and Cyber Monday, Riskified was able to safely approve 75%
of the orders luxury fashion merchants had planned to decline. That means the
3 out of 4 orders that had been marked as fraudulent were actually legitimate.
That's an increase of over 50% over the false decline rate for these merchants
on a regular day.

The effect of this misconception is disastrous for merchants. Instead of

accepting more orders than usual to benefit from the glut of legitimate orders,
a misunderstanding of the realities causes them to turn away good customers
and lose significant revenue at the most important time of the year.

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Conclusion
The increase in global online purchases, including both domestic and cross-
border shopping, presents a huge opportunity for merchants across the fashion
vertical to reach new markets and revenue streams. Market research already
shows that over half of global online retail consumers make a clothing or
accessory purchase. Maximizing the ROI from these opportunities, however,
requires that merchants make accurate fraud prevention decisions and avoid
false positive declines. This, in turn, requires a decent understanding of the
shopping patterns that characterize legitimate and fraudulent transactions.

as much as ten
During sales we process
usual. Knowing that
times more orders than
to support us through
we can rely on Riskified
peace of mind
busy periods gives me

se
ud & Risk Manager, Ssen
Justin Beauchamp, Fra

Riskified’s eCommerce fraud management solution utilizes multiple fraud

detection and analysis methods - including data enrichment, proxy detection,
device and browser fingerprinting, elastic linking, machine learning
technologies, and behavioral analytics - to achieve the most comprehensive
understanding of fraudulent and legitimate shopping patterns in real-time. We
published this report in the hope that by sharing from our data and experience,
we will support merchants looking to balance the desire to expand eCommerce
operations with the need to remain protected from fraud.

I would say Riskified changed our live

s… Doing
fraud review yourself based on limited
time and
knowledge was simply not a process
we should have
been handling ourselves. So, we wer
e thrilled to stop
and implement Riskified instead

Eileen Shulock, VP of eCommerce, Kirn

a Zabête

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Riskified has extensive experience working with online fashion retailers across
the globe. Since every fashion business has different goals and faces unique
challenges, we allow merchants to get the most out of our system by offering
flexibility in the way our expertise is harnessed. Riskified supports top brands
such as Ssense and Farfetch on a daily basis including during busy holiday
sales, allowing them to recoup significant revenue from transactions that would
otherwise be declined. In the case of retailers such as Vestiaire Collective and
Kirna Zibete, Riskified takes on the entire fraud review process and the liability,
allowing these merchants to remain focused on growing their customer base
and providing a seamless shopping experience.

Riskified has proven itself with ver

y high approval
rates and an outstanding turnaro
und time

Michael Benisti, Head of Paymen

ts and
Revenue Protection, Vestiaire Col
lective

We believe sharing best practices and data is key to ensuring we all remain
protected from CNP fraud. If you have experienced any of the fraud patterns
shared in this report, or if you are currently facing other fraud management
challenges - we'd love to hear from you. To join the conversion, visit our
website or contact us at sales@riskified.com.

Interested to learn more? Visit www.riskified.com

We love talking about risk management! or email sales@riskified.com

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