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How Online Travel Agencies Can Fight Huge Fraud Losses

posted on: Tue Apr 25 2017

Annual revenue for Online Travel Agencies (OTAs) is expected to reach $434 billion by 2020, with 53% of all travel booked online. Although OTA growth is slowing due to consolidation and increasing maturity in the online market, a double-digit compound annual growth rate (CAGR) is nonetheless projected for 2015-2020. The dark cloud in this news? The travel industry is by far the number one target for fraudsters, accounting for 46% of fraudulent transactions, according to data from RSA.online travel

With fraud losses averaging 1% to 2% of sales across the industry, that means OTAs could soon be experiencing annual fraud losses as high as $8.6 billion a year. Those are huge losses. And yet, even those numbers don’t tell the full story.

Consider that large, global OTAs account for the majority of transactions and that these organizations typically utilize more sophisticated fraud prevention systems. This likely puts them at the lower end of those industry averages. Possibly even below 1%.

This indicates that smaller, regional OTAs must be experiencing much higher rates of fraud. In fact, Phocuswright reports that mid-size travel agencies with revenues of $1 to $10 million annually are getting hit the hardest by fraud (Fraud and the U.S. Travel Agency Marketplace, prepared by Phocuswright). This is attributed to a number of factors:

  • Often a lack of formal fraud prevention process
  • Not every transaction is handled by an experienced agent
  • Higher volumes of riskier online transactions

What’s more, hotel bookings – which have been the driver of new OTA revenue growth as airline and car rental bookings have been relatively flat for the past few years – experience much higher fraud rates than 1% to 2%. According to the American Hotel & Lodging Association (AHLA), as many as 6% of online reservations are made through fake hotel booking sites, allowing criminals to steal $1.3 billion annually.

Adding to the financial pressure on OTAs, providers have been aggressively pursuing direct bookings in an effort to avoid paying commissions. For example, airline websites now account for about 75% of online bookings. Further, new players such as Google and Trip Advisor are making strong competitive inroads. When these trends are factored together with continuing consolidation and slowing growth, it’s obvious that OTAs need to find ways to cut fraud losses in order to maintain profitability levels. And they need to do it quickly.

For new entrants into the OTA market, the time, cost, and staffing required to build enterprise-class fraud prevention systems capable of thwarting fraud can be daunting:

  • 6-18 month build and development times
  • Millions of dollars in IT infrastructure, software, systems, and headcount
  • Difficulty identifying and hiring the required risk management expertise

Even for mid-size and larger OTAs that have some form of fraud mitigation in place, enhancing existing fraud prevention systems to achieve the levels necessary to substantially reduce fraud is still a time-consuming and expensive undertaking. That may be the reason why more and more OTAs are turning to third-party fraud prevention providers.

For example, webjet.com, Australia and New Zealand’s leading online travel agency, recently began working with Kount to enhance their fraud prevention capabilities. In a relatively brief period of time, they were able reduce their chargeback percentage to just .03% of Total Transaction Volume, 98.4% lower than the Australian Online Travel Services benchmark of 1.9%. What’s more, this dramatic decrease in chargebacks did not require additional manual reviews. In fact, thanks to Kount’s advanced automation capabilities, webjet.com was able to achieve an 83% reduction in bookings reviewed. Even more importantly, webjet.com saw a 116% increase in orders accepted

How can OTAs achieve this kind of success? It’s vital to employ an enterprise-class fraud prevention solution that uses a multi-layer approach. Kount incorporates these 4 capabilities:

  1. Real-Time Analytics. Multiple layers of fraud screening technologies working together in real time create multiple hurdles, obstacles, and barriers that thwart ever-changing fraudster tactics. In addition, the integration of all these data elements adds an additional, cumulative layer: the “network effect” of Big Data. Yet even when multiple variables are being analyzed, it’s essential that processing occur in mere milliseconds to ensure a frictionless experience.
  2. Powerfully Integrated Tools. Integrated, automated access to best-in-class data providers, such as Emailage, Ethoca, Experian, LexisNexis, TeleSign, Whitepages Pro, etc. enhances a multi-layer fraud prevention approach. This additional information provides critical context for even greater insight. Further, to save time, money and effort, these services should be accessed only when additional context is required. Finally, automating decisions based on these multiple data feeds is key to ensuring that multiple and complex use cases are not a problem.
  3. Artificial Intelligence and Machine Learning. Artificial intelligence (AI) multiplies the network effect of Big Data by using massive memory and computing resources to quickly recognize patterns otherwise undetectable to humans. Kount is a pioneer in the use of AI, employing it for nearly a decade. Kount’s patented graph theory algorithms (PERSONA™) extract highly predictive features in real time across the entire network. This provides deeper and more rapid identification of fraud as it emerges.
  4. Human Expertise. A final critical layer is expertise in the fraud domain. It is essential to enhancing the other three layers, plus making sure that AI and machine learning is guided by rules that enable online merchants to fine tune risk/reward decisions and maximize sales and profits for their unique business needs.

For OTAs that are looking for better ways to fight online fraud and reduce losses, Kount provides a number of useful resources that offer additional insights, including: 

Download the case study: Webjet Sales Take Off While Fraud Costs Get Grounded. Read how one OTA got their chargeback rate 98.4% lower than the industry standard while more than doubling the number of orders accepted.

Download the white paper: Today’s Fraud Challenges Facing the Travel Industry. Discover how a multi-layered approach to fraud prevention helps OTAs fight fraud better.

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Download the eBook: Fraud Takes Off in the Travel and Leisure Industry. Find out the 7 capabilities OTAs should look for in an enterprise-class fraud solution.