What’s new in 2022 when it comes to e-commerce fraud and compliance? Predictions to watch

We spoke with Christian Mangold, CEO of Fraugster, a payment intelligence company serving the e-commerce and payments ecosystem, to get a glimpse of what’s on the horizon

In 2021, the digital economy has taken a giant leap into the future with the arrival of web3 and the emergence of NFTs as a secure store of value for digital assets and collectibles. So what can we expect in 2022? Will the coming year bring as many changes as the year just past?

Prediction #1 – Fraudsters will exploit Web3 openness using stolen financial data

The metaverse, also known as web3, is a decentralized version of the internet where platforms and applications are built and owned by users. Meta (formerly Facebook), Microsoft, and a host of major game companies are early movers in this space and building the future of our digital economy. So while we should certainly expect exponential growth in digital assets in 2022, that doesn’t just mean high-value NFTs, but also low-value, high-frequency in-game purchases for things like swords. , skins, and usernames, also known as downloadable content. (DLCs).

The main risk this presents is that these environments are prime locations for fraudsters to test stolen financial instruments (to see if they are approved) before making higher value purchases. This presents a massive chargeback risk for merchants, and especially gaming companies. Alternative payment methods such as cryptocurrencies are also not without risk, as they offer little or no purchase protection to customers. We therefore anticipate an increase in fraudsters exploiting the nascent web opening3 using stolen financiers readily available on the dark web, but soon to be even more easily tradeable in the metaverse.

At the same time, we expect an increase in the number and value of scams from fraudsters posing as creators. A benchmark example from 2021 was Squid Coin, a scam cryptocurrency named after the hugely popular Netflix series, Squid Games, which earned scammers around $3.5 million. Curators of Web3 environments will need to introduce additional KYC checks and better “creator oversight” to combat this threat. We are already seeing online marketplaces tackling this problem with merchant monitoring solutions, which led us to believe that web3 platforms will need to take similar action. The challenge is that web3 is going to be a lot like the Wild West for the foreseeable future, especially as metaverse environments become more interoperable. Consumers will therefore need to be diligent.

Prediction #2 – The Beginning of the End for Credit Bureaus in Ecommerce

Many BNPL providers rely on credit bureaus like Equifax, Experian, Transunion, and SCHUFA to assess the creditworthiness of new customers. The problem is that many millennial and Gen Z cohorts have a limited credit history; therefore, credit bureau checks are becoming less and less effective in determining their true creditworthiness in an e-commerce context. Simply put, the risk of default cannot be treated in the same way for a $100 pair of sneakers as it is for a mortgage. We anticipate that the increase in BNPL will accelerate the shift to alternative data sources that help providers make more accurate credit decisions by analyzing: positive transaction history, deposit account history and behavior regarding reimbursement of daily bills such as smartphone contracts, broadband, gas, and electricity. Recent acquisitions of major credit bureaus suggest they see this change coming, but we believe they have underestimated how quickly their positions could be eroded by alternative credit decisions made possible by Open Banking and the network intelligence it provides.

Prediction #3 – Fraudsters and good customers will become harder to tell apart

More and more online shoppers are now using VPNs to hide their IP address and protect their personal data online – a behavior often seen among fraudsters and which typically increases a transaction’s risk score. It will become more difficult to tell the difference between the two, especially as fraudsters become more sophisticated at mimicking the behavior of good users to avoid detection. On the one hand, it could increase the percentage of false positives, on the other hand, it will test how accurately vendor solutions can distinguish good transactions from bad ones, which can be measured by tracking the rate of approval of good users.

Prediction #4 – Compliance costs will continue to skyrocket, including fines imposed on institutions that fail

In 2021, record fines were imposed on companies that failed to comply with anti-money laundering regulations. We expect total compliance costs (headcount, processing costs, and vendor costs) and fines imposed to increase in 2022. Why? Because the 6th Anti-Money Laundering Directorate (6AMLD) expands the scope of money laundering offenses to include those who aid and abet, incite and attempt an offence. This will make it easier for law enforcement to pursue those who are often portrayed as facilitators of money laundering or serving as accomplices in money laundering schemes. The biggest winners will be those who can take advantage of technologies such as transaction monitoring and sanctions and politically exposed persons (PEP) lists to avoid entering into illegal business relationships.

Prediction #5 – A response to false identities

In 2021, we have seen a massive increase in the use of fake and synthetic identities, constructed from stolen information widely available on the dark web. This has made it easier for fraudsters to pass KYC checks for new services such as BNPL, gift cards, and online gaming platforms. We expect this trend to continue, but anticipate a response as machine learning algorithms improve to identify signals indicating an increased likelihood of fraud, such as frequent changing of IP addresses, device ID mismatches and frequent asset jumps.

About Christian Mangold

Christian is a seasoned growth executive who successfully scaled SOFORT prior to its acquisition by Klarna, where he served as Managing Director for the DACH region. As co-CEO, he directs all of Fraugster’s day-to-day operations. In his spare time he is an outdoor enthusiast who enjoys skiing and sailing with his wife and three children.

About Fraugster

Fraugster is a payment intelligence company that helps the e-commerce ecosystem minimize fraud and maximize revenue by making smarter business decisions in real time. We help our customers (PSPs, BNPL providers and e-merchants) solve multiple use cases by giving them access to various interoperable products through a single integration. Fraugster has developed one of the most accurate AI fraud prevention solutions on the market and is backed by some of Europe’s most reputable advanced technology investors.