Even with high interest rates and uncertain economic signals, the forthcoming holiday season is projected to be promising for online retailers. Deloitte anticipates 10.3% to 12.8% growth in e-commerce sales for the 2023-2024 holiday shopping season (year-over-year) and projects overall shopping period retail sales to reach almost $284 billion. Even in a sluggish economy, e-commerce is projected to constitute nearly 20% of overall holiday sales and contribute 48.5% of the incremental spending gains for all holiday-related spending.

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But as the online shopping frenzy peaks during the holidays like Christmas and New Year, so does the potential for fraud. While the expected growth is certainly welcome news, the corresponding potential for risk creates pressure on fraud and customer experience teams who want to capture new customers and grow sales but must also avoid fraudulent activity from damaging their businesses. They must offer e-commerce options to cater to online consumer needs, but they also have to fortify their defenses against potential cyber threats. Retailers can strike this balance effectively by applying an effective identity verification approach, such as Prove, that establishes rigorous fraud-prevention measures. In doing so, they can optimize their e-commerce operations while effectively thwarting the attempts of fraudulent actors.

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A number of economic and technology-driven factors are fueling changes in how retailers offer goods and services and in the expectations of consumers. However, these factors are designed to enable more front-end e-commerce and may not fully account for every possible fraud scenario. We will look at these three factors, and their implications for the 2023-2024 holiday shopping season, in this blog:

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1. An increase in Buy Now, Pay Later options, and more usage of this purchasing convenience by consumers.
2. The holiday season will get started earlier this year. It’s early October and the holiday shopping season has effectively already begun.
3. More shopping personalization options on e-commerce websites. 

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First, let’s consider how fraud has “grown up” with e-commerce, and look at the challenges faced by online retailers.

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Do E-Commerce and Fraud Need to Go Hand-in-Hand?

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The rise of e-commerce over the previous 20 years has unquestionably been a boon to retailers, as it has created new sales channels and entirely new businesses. Successful online retailers have learned to adapt their services and offerings to changing market conditions, economic factors, purchasing trends, and even unexpected global changes like the COVID-19 pandemic. In the face of these changes, they have invested in new technologies that are designed to improve target marketing, sales operations, supply chain logistics, and a number of other factors that enable them to scale while remaining agile and relevant to their customers.

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From personalized recommendations to virtual try-ons, retailers are leveraging technology to replicate the in-store customer experience and engage customers in innovative ways, making their online offerings even more appealing. Online retail has even fostered new financial technologies like mobile wallets, cryptocurrencies, and Buy Now, Pay Later (BNPL), an option that allows consumers to purchase goods and services in increments, through quick credit.

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Amidst all of this change, however, the specter of fraud never ceases. Even with new technologies aimed at combating bad actors in e-commerce, fraudsters seem to get more creative at scams, attacks, and other ways of exploiting e-commerce services. They have increasingly employed phishing, identity theft, and ransomware attacks, honing in on opportunities where lax identity verification provides them with ample access to new types of services that are vulnerable. 

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Confronted with the escalating threat of identity fraud, the e-commerce sector has had to strengthen its security measures to ensure transaction integrity and customer authenticity. Simultaneously, there is greater scrutiny for online businesses to meet compliance mandates for anti-fraud regulations such as Know Your Customer (KYC) and Anti-Money Laundering (AML) laws and policies.

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Retailers have had to orchestrate the verification process to ensure it is both efficient and thorough, effectively mitigating identity fraud while preserving a streamlined and enjoyable customer journey. Achieving this balance is pivotal to the success of online retail in the face of evolving fraud trends in the coming holiday shopping season.

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3 Fraud Scenarios to Look Out for This 2023-2024 Online Holiday Shopping Season

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We know that this holiday shopping season will be unique. While high interest rates and a feeling of economic uncertainty among consumers might not reduce their overall expected spending, these and other factors suggest buyers will seek different ways of engaging in online retail. They will look for options that help them buy quickly and pay less, all while they seek a positive customer experience. 

There are three key factors we anticipate impacting online retail this coming holiday season, and each one presents some form of fraud risk. Yet, e-commerce vendors who apply the necessary levels of identity verification can dramatically reduce instances of fraud, and all the while, take advantage of these new and lucrative avenues that improve the retail customer experience and lead to more revenue:

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1. High Interest Rates Make BNPL a More Attractive Option

Credit is an attractive option for many consumers, and U.S. households now hold more than $17 trillion in debt. Interestingly, credit has been a fairly static financial instrument until the introduction of the “Buy Now, Pay Later” (BNPL) option. It has emerged as a practical solution, allowing shoppers to establish deferred payment methods and plans while acquiring their holiday purchases immediately.

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Amidst the prevailing inflationary climate, BNPL is particularly attractive. The surge in 2023 Back-to-School spending offers prescient insight, as almost half of consumers used BNPL and related financing options to purchase clothes, supplies, textbooks, and laptops. Easy to use and available to almost all consumers, BNPL will undoubtedly be a popular option for holiday shoppers this year.

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Retailers are rapidly integrating BNPL options into their customer experience, with 54% of the top 1000 retailers offering at least one BNPL option to their customer base. Last year, BNPL orders accounted for almost 4% of online retail holiday shopping. In 2023-2024, it is expected to be as much as 9% of online retail orders. 

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Online retail BNPL vendors can strengthen their security measures and combat every type of fraud effectively by implementing robust identity verification methods. While retailers are in a rush to onboard customers, ensuring proper verification of essential customer information is equally critical—this typically includes verifying details like name, address, Social Security number, and contact information. This verification is not only essential for fraud prevention but also for performing a soft credit check before granting a loan. To streamline this information collection and enhance identity verification, a growing number of BNPL companies are adopting phone-centric identity validation and authentication.

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Given the increasing trend of consumers using cell phones for both in-person and online purchases, leveraging phone-centric technology is a logical step for BNPL companies to mitigate fraud effectively.

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The Prove Pre-Fill® digital identity solution is already being used by leading online retailers as a powerful tool to harness phone-centric identity, significantly reducing onboarding time, boosting sign-ups, and acting as a deterrent to fraud. For both BNPL qualification and online purchasing, the use of pre-filled forms makes consumer experiences quick, but effective as a fraud deterrent. 

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Instead of forcing consumers to fill out cumbersome forms to sign up for accounts, Prove Pre-Fill automates this process by auto-filling verified information (with explicit consumer consent) from authoritative sources. Beyond enhancing efficiency, it serves as an additional layer of fraud prevention by inhibiting imposters from using stolen information that is not associated with their respective phone numbers. 

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By alleviating customer keystroke fatigue and reinforcing security, Prove Pre-Fill aids BNPL companies in preventing customers from abandoning the application process, significantly improving conversion rates. During this streamlined process, Prove Pre-Fill also conducts Possession, Reputation, and Ownership checks, further fortifying the prevention of identity takeover and fraudulent registrations.

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2. The Holiday Season Starts Earlier, Increasing the Fraud Landscape

Even as heat waves baked parts of the U.S. back in September, you probably already saw holly wreaths popping up in your local stores, and are already getting holiday discount offers in your email inbox. 

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A recent study of 1,000 American consumers revealed that 42% of respondents indicated their intention to start their 2023-2024 holiday shopping in late summer. The study pointed to the impact of inflation, with 79% of consumers acknowledging that their spending has been affected in recent months and that it is encouraging them to space out spending over many months and seek out discounts and holiday deals. At the same time, consumers with higher incomes are also demonstrating a greater propensity to commence their holiday shopping early, with 44% already underway.

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The growing population of ready-and-willing consumers awaiting holiday deals has prompted retailers to begin discounts early. Retail giants like Amazon, Walmart, and Target are leading this charge by showcasing holiday merchandise in sales events earlier, aiming to boost consumer spending. As a result, consumers are already adopting a holiday mindset, eager to secure the optimal deals for their holiday purchases.

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While the extended holiday shopping season might be a boon to retailers, it also creates an attractive environment for fraudsters. The opportunities for fraud increase because there is a broader transactional landscape over which fraudsters can exploit. This includes things like increased transaction volumes over a longer period. More shoppers, making unusually large purchases, and for an extended period, presents a great opportunity for fraud. Retailers tend to relax scrutiny on larger purchase volumes and might even relax onboarding standards at a time when it is especially competitive to attract new customers. 

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To counter this, online retailers need to be proactive in implementing stringent security measures, educating customers about potential risks, encouraging vigilant behavior, and employing robust fraud detection technologies to swiftly identify and mitigate fraudulent activities during the extended holiday shopping season.

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3. More Consumer Personalization Increases Opportunities to Impersonate 

In the face of escalating competition and customer acquisition expenses, online retailers have sought ways to differentiate themselves. Innovative technologies have enabled e-commerce vendors to provide more personalization features that both attract customers through highly customized marketing efforts and deliver one-of-a-kind shopping experiences. 

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Consumers love it. In fact, 75% of shoppers of beauty products are now willing to pay extra for personalized online shopping experiences. Forrester says that 77% of consumers have opted for, advocated for, or even paid a premium for a brand that offers a personalized service or experience.

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Customers tend to revisit a business that employs personalization as they perceive a deeper understanding of their needs. When interacting with a personalized website, individuals feel that the brand is custom-tailored for them. The knowledge that a brand can efficiently guide them to what aligns with their requirements significantly boosts their inclination to revisit, appreciating the time and effort saved in the process.

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Identity verification is a critical safeguard against fraud, particularly in an environment where e-commerce shopping experiences are increasingly personalized. As personalization grows to cater to individual preferences, fraudsters may attempt to exploit this tailored approach. 

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The majority of prominent retailers currently provide personalized product suggestions, tailored email communications featuring individualized promotions, and advanced profiling mechanisms. These features allow customers to shape their interactions with the business according to their preferences.

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In scenarios where these components are absent, customers might purchase items that don't precisely align with their expectations, lack personal targeting, or simply aren't what they were seeking initially. Buyer's remorse, a significant factor in chargebacks and friendly fraud cases, often stems from these situations. By amplifying personalization at the consumer level, retailers can significantly mitigate this issue.

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By integrating identity verification seamlessly into the personalization process, online retailers can ensure that personalized recommendations, offers, or promotions reach the right recipients and those who are valid customers. It creates a secure bridge between personalized experiences and genuine customer identities. This means that any attempt by a fraudster to manipulate the personalized features is met with authentication barriers posed by identity verification, effectively thwarting fraudulent activities.

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Identity verification methods like biometric authentication can be part of the personalization journey. These advanced techniques not only provide an additional layer of security but also seamlessly integrate into the personalized experience, making it smoother for the genuine user while creating a deterrent for potential fraudsters.

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As e-commerce evolves towards a more personalized shopping experience, identity verification is instrumental in ensuring that this customization remains a tool for enhancing genuine customer engagement rather than an avenue for fraudulent exploitation. It helps strike the delicate balance between personalization and security, assuring a safer and more trustworthy environment for both retailers and consumers.

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More Cheer, Less Fraud Fear

This holiday season, online retailers are recognizing the dual benefits of robust identity verification systems. Not only do these systems help in preventing fraud losses, but they also enable retailers to acquire and convert more customers by providing a seamless and efficient onboarding process. 

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At Prove, we're empowering online retailers to seize this opportunity. Recently, we announced a cutting-edge onboarding solution in partnership with Visa. This innovative technology ensures a fast and easy identity verification process, allowing retailers to strike the right balance between security and user experience.

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By leveraging advanced identity verification solutions, online retailers can protect their businesses from fraudulent activities during the holiday season and elevate customer satisfaction, drive loyalty, and ultimately boost revenue. This holiday season, let's gear up to embrace a future where robust security and exceptional user experience go hand in hand, creating more opportunities for both retailers and customers to thrive.

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Prepare for the upcoming holiday season with a comprehensive fraud prevention plan. Get our definitive ebook, “The End of Holiday Shopping Fraud”