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Podcast - Mitigating Fraud in the Direct Selling Space

posted on: Wed Dec 20 2017

In a podcast interview from MLM.com, Trent Spratling from Kount tells us about the evolving landscape of fraud and the ways that fraudsters target MLMs specifically. 

Listen to the interview here:

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No time to listen to the podcast? No problem, feel free to read some highlights from this interview with MLM.com host, Kenny Rawlins below.

Kenny:

What is it that can be different about monitoring fraud when you’re working with a direct sales company?

Trent:

When you look at a direct seller, you’ve got opportunities for people to become a distributor and then commit commission fraud. Or let’s say you are a distributor and you start buying from yourself and trying to commit commission fraud. You have guest checkout where it is like a [regular] retailer. So, you get all those things and then you have people putting their distributor number on their social media account so some [fraudster] grabs that to look like a good customer. There’s just more ways for them to disguise… looking like a good customer and then you add on top the ability to earn a commission… it can really put a target on your back…

Trent:

Kount was created out of that space where third-party sellers drive the revenue for a business. So, we’ve worked really well in the direct selling space because of that background. We’re the only one in the industry that was born and created for that exact use case.

Kenny:

What are some of the benefits of using additional bits of data to help weed out the good guys from the bad guys?

Trent:

What merchants really need is digital behavior analytics about how data points are being leveraged, and where we’ve seen them, and how they’ve been utilized, to identify patterns and behavior-of-use…if I had to boil it down, you can’t rely on clear-cut, database, “is this a legitimate card?” You’re not going to catch the fraud that way in today’s world. They’re way past that. It’s you got to grab whatever piece of data you can about their behavior and how they’re acting in the use of the data points.

Kenny:

… the risk of doing this in-house, or doing this with somebody who worked in a fraud department at some other company and has limited experience, is you’re not keeping up with the times. You’re not keeping up with the speed at which the bad guys, so to speak, are innovating and getting used to new tools.

Trent:

… when you add the ability to gather insight and data that they actually have no access to or that they couldn’t do in-house without investing tens of millions of dollars, it enables those teams to maybe cut down—automate a lot—but it just gives them more insight to make better decisions.

Trent:

… people will say to us “our fraud rate’s around 0.5% well under 1%. Our processor’s not on our coattails.” And we’re like “would you want it to be a 0.1%?” “0.1%? Well yeah.” “What would 0.1% mean to your business.” “Oh, it’d be 50 grand a month in savings or avoiding loss.” Our merchants in the direct selling space are between 0.1% and 0.2%. In fact, some of our larger ones are under 0.08% around 0.05%. So, when they start understanding where they could be with less effort, that’s when direct sellers start saying, “allright, maybe we do need to make an improvement here.”

Kenny:

… being able to pass information that’s relevant to the way we do business in the direct sales space—like enrollment date and things like that—you can then create rules that are based on other metrics. Is that accurate?

Trent:

Yep. So, you got to think of it this way, Kount’s providing a lot of digital data, a lot of information patterns and we’ll actually leverage our entire network. Every transaction that comes in from a specific merchant, we compare it across every merchant using Kount worldwide. We provide a lot of insight, artificial intelligence, machine learning assessment, and all these things. Now you take that, it’s gonna automate and speed up a lot of things but, yes, you’re gonna have those unique things that you need to account for. You can take that data, combine it with yours, create some rules to help out.

Trent:

So, you’re definitely correct and we want to help make those more insightful so it reduces time spent, reduces the time to being shipped, keeps the process flowing and opens up that [sales] funnel as much as possible, and you’re not casting too wide of a net to where you’re declining good people. Hey yeah, my billing and shipping doesn’t match. Gosh that’s so normal! And yeah, I am ordering something $500. There needs to be some more behind it. What’s their riskiness profile? What did we find in the device? Maybe they’re trying to disguise their true location. We need to have more information behind it to say, “that should be a hard decline.” That’s really what we’re trying to help merchants do. Yeah, keep the fraud down, but let’s open up the funnel and make accurate decisions and go into more risky things, open up different countries, launch virtual gift cards. All those things. That’s what we also want to enable the merchants to do—not hold back.

Kenny:

You know it’s funny. I just—probably ten minutes before we started recording—placed an order that was shipping to a different shipping address than my billing address that was over five hundred dollars. I would have been one of those false positives. That’s definitely something that you don’t want.

Trent:

Think about it this way too: what’s the annual value of a customer for a direct seller or the annual value of a distributor? What’s the lifetime value of a customer, a distributor? When you start looking at what the cost of a false positive is, it becomes much greater than just that initial sale.

Kenny:

…we’re coming into an interesting time of year, with the holidays. What do you guys see when it comes to holidays? Is that an increased fraud time? I mean it certainly would seem to be that way because you’ve got people who are a little bit more strapped for cash. But what do you guys see on your side?

Trent:

Any merchant that has something that can be gifted, their sales are going up and their fraud’s going up. Even then—if you’re putting yourself in a fraudsters mind and you kind of get how they look at things—when people guards are down or there’s so much [happening] it’s hard for them to be on top of things, that’s what they really try to exploit. So even if a merchant’s Q4 is really not that heavy, well you know… fraudsters are testing systems right now. They’re testing people’s websites. What filters do they have in place? How easy is it for me to crack in? And then on Christmas Day, New Year’s Day, Cyber Monday—when it’s just gangbusters— they’re going to town on it and they’re trying to sneak in there or hit you when you’re the most vulnerable. So any direct sellers listening to this, if you are launching promotions you should know exactly what’s going on in the holiday season. You should be aware of people passively testing out, and reaching out, and seeing what they can do. Come those days when no one’s around or it’s really busy, you can expect to see them there. A lot of our direct sellers’ products are very good for gifting and lots of parties going on by distributors.

Kenny:

And a lot of promotions going on to help drive that activity. I’ve worked with different people in the industry who’ve been surprised as they’ve gone in and consulted with companies and people say, “we don’t have much fraud happening.” And then you get somebody with a trained eye who gets in and start sifting through it. There’s no such thing, in my experience, as an online business or a business with an online presence that doesn’t have some level of fraud going on and that isn’t losing money somehow. It’s just whether or not you’re tuned into it and equipped with the tools to fight it.

Trent:

I like to ask “do you believe fraud is not going to increase?” and people always say “no it’s going to increase.” Then why wouldn’t you get in front of it now? and it’s you know the fraud team, the ecommerce fans are always like “yeah let’s get in front of it now! you know let’s do this!” For companies—and it’s rightly so—conversions are key, new sales are key. “Hey, our fraud’s only a million dollars out of thirty five million in sales this year. Eh. We’ll live with it.” So, they kind of wait till hell breaks loose on it and there’s really some misconceptions around a fraud solution. “That costs money. Fraud’s just part of doing business. That won’t happen to us.” And it’s crazy to me because—like you said—you dig in a little bit and you go “well your gateway settings… you’ve got some pretty strict filters in place. You’re probably turning away good business too.” And they go, “well we’re fine. We’re happy with where we’re at. We’re getting sales. We’re still growing. And yeah we’re probably turning away good customers but you know it’s keeping the fraud away.” To an extent, I can respect that and it’s no big deal. But I’ve never met an online company who says “we never get fraud. Zero percent.” And being able to deal with it, it can be really tough in an organization. In fact, I had a call with another pretty well-established direct seller. Been in business for over a decade.

Kenny:

I’ve seen over and over again people use a bunch of different solutions, but it’s always been worth the time and the money to get experts in who know what they’re talking about—like you guys do—and really fight that. It can be demoralizing when your stuff ends up on “gray markets” or on eBay or whatever and you’ve got a distributor field out there really trying to make a living with this stuff. It has more of an effect than just the dollars and cents of what percentage of orders are fraudulent. I’d encourage everyone out there to be thinking hard about this and to be planning for how you’re going to address fraud because it certainly is happening and every day the criminals and the bad guys, so to speak, are getting better. We appreciate your expertise, Trent and your time this morning. Thank you so much.

Trent:

Yeah you bet! Glad to be on MLM.com doing this podcast and I appreciate the time. Everyone thinks their product’s the greatest thing on earth but we’ve seen it time and time again where Kount is helping companies grow their revenues, protect brand image, reduce time internally and automate a lot of their process. It makes life a lot easier and you definitely see some real results.

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