Podcast: Breakdown of Fraud Risks for OTAs

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David Zweifler, Fraud.net: [00:00:00] This is David Zweifler for the Fraud.net podcast. Today I’m speaking with Cathy Ross, President of Fraud.net today we’re discussing the 2020 Benchmark Travel Study that was recently produced by Fraud.net. There were some blockbuster findings in that report, which highlights risks to OTAs, and showed that a whopping 15% of attempted purchases on the Las Vegas to Los Angeles airline route were fraudulent.

They also revealed some counter-intuitive findings around black cards and high-limit corporate cards during rates or fraud on those blue chip credit vehicles far in excess of what you see on normal Amex green cards.

Thanks for joining us today, Cathy. So, according to the online travel survey, where are the areas of greatest risk? And what can online travel vendors do to avoid fraud?

High Risk Travel

Cathy Ross, President and Co-Founder, Fraud.net: [00:00:50] Higher- price tickets — international — or that are bought for last minute travel, are the areas that there tends to be more risks, as well as tickets that are easily changeable or redeemable, for cash. So they’re refundable. And it’s because, fraudsters do a few things.

They, obviously want the higher price tickets, but they also will take, refundable, long-term tickets or short-term tickets and, and go in and refund them for cash. And it’s just always an issue. They’re not really generally going to go in for a $15 or $30 insurance claim. But that’s where a friendly fraudsters go.

So big-ticket guys generally go in for, I take that back. Professional fraudsters generally go in for big tickets, refundable, and they can exchange it for cash, either in person or online. Friendly fraudsters tend to go for smaller-ticket items, like saying, I didn’t order the insurance, or I don’t want to pay for the seat booking, and they’ll do that through chargeback.

So there’s two types. and I think OTAs and airlines have to look at both. Because they’re probably pretty similar in size in terms of total cash. So you get a lot more friendly rosters, but the big guys go after bigger money.

David Zweifler, Fraud.net: [00:02:18] Friendly fraud. Can you walk me through a friendly-fraud scenario with an OTA?

Cathy Ross, President and Co-Founder, Fraud.net: [00:02:23] Yeah, so there are two things that we’re seeing kind of pretty often is one where they’ll buy insurance. and do a chargeback because after they traveled, they didn’t actually need the insurance. And then the second thing that we really see is if they purchase a ticket, and then they see a lower price come out for the same ticket, is that they’ll do a charge back on the more expensive ticket to cancel it, and then they’ll buy the lower price ticket.

I believe that many of the banks had been penetrated. I believe that a lot of their cards are available for sale… A lot of them have had breaches. So what we’ve seen is we’ve seen full blocks come out of the issuing banks — full blocks — where 90% of everything there is fraud.

And so that is, you know, kind of a pretty big problem. And that comes in not to get too complicated by a lot of the pricing AIs, and machine learning where, OTAs are trying to price. So in other words, you go on one time and the ticket is slower and then the next time it’s $15 higher. And so there is a pricing mechanism per person that OTAs are trying to do.

And when somebody even sees like, you know, a $15 or $25 drop in a ticket price. They’ll just charge it back and go buy the cheap, cheaper ticket, and that ends up costing the OTA more money, then maybe not fooling around with the pricing so much.

How OTAs and Carriers Can Protect Themselves

David Zweifler, Fraud.net: [00:03:38] You’ve identified some high risk areas, what can OTAs and carriers do in terms of prevention tools or best practices.

Cathy Ross, President and Co-Founder, Fraud.net: [00:03:50] Analytics is crucially important, I think for OTAs. The margins are so thin that if they don’t have clear line into their businesses and are able to write rules, to reflect those and use best practices for rules is that they’re easily manipulated. Fraudsters will get around rules. And this is where collective intelligence really becomes important here because we can see rules that play across.

So in other words, let’s say that if you have really good analytics, you could see on a velocity level that somebody canceled the ticket and we bought another ticket somewhere else. And that’s where a collective intelligence is important. And that’s where analytics isn’t important because then you can fight the chargeback with MasterCard or the merchant account, you could fight it to show that they, what they did was not cool.

Better rules, collective intelligence, even collective intelligence on the rules, right? Like there are industry best practices and one company may have figured it out. But if the other companies don’t, then it leaves them vulnerable. And what ends up happening is that we can see fraudsters jump from place to place to place.

David Zweifler, Fraud.net: [00:05:06] You know, if I use fake, if I use a fake credit card to buy a surfboard from Amazon, they deliver that item to me. If I’m successful, I take it and I’m in the wind, right? But with travel, if you buy a fake ticket, not only you getting that ticket, but like you now have to spend several hours with the company that you’re ripping off.

I would think that travel would not be as susceptible to fraud. as it is, what, what do you think is going on there?

Why Travel Sees So Much Fraud

Cathy Ross, President and Co-Founder, Fraud.net: [00:05:43] You would really think with travel that there would be less fraud, but there’s actually more. And it’s because some OTAs and airlines have rules that stop it and others don’t. And to a large extent, travel has been treated like cash.

If you have a refundable ticket, you can walk in and you can buy it online and walk into Delta and just get your cash back.

David Zweifler, Fraud.net: [00:06:06] You could almost use it as like a… Like a shadow banking account.

Cathy Ross, President and Co-Founder, Fraud.net: [00:06:11] Yeah. Yeah.

David Zweifler, Fraud.net: [00:06:12] So the fact that carriers treat tickets like cash, that that makes this problem worse. It sounds like

Cathy Ross, President and Co-Founder, Fraud.net: [00:06:18] It does. And and what we have seen in, again, some OTAs have figured this out, some travel agencies have figured out, and some airlines and then some haven’t.

The other thing that people do is that they will book tickets for the real people that the credit card belongs to, and they’ll book, you know, four tickets and they’ll take one. And so it looks like a business trip. where, you know, we were booking travel, that might be, you know, two colleagues or three colleagues and everything looks copacetic, but it’s the third or fourth person on that itinerary that is a complete roster. And unless you’re able to dig that deep and write rules that deep into the system, which I’m telling you other companies just have not written yet, you, you can’t stop them.

And they, they’ve just found that loophole. And. Like I said, some people have figured it out. Some people haven’t. Some people that created rules and a lot of systems don’t say, “If there’s a fraudster in the group, let’s find that fraudster and weed them out.”

Fraudsters Hide Amidst Impulsive Buyers

David Zweifler, Fraud.net: [00:07:24] Now in the travel report you just produced, you showed that there were some route combinations that had just crazy levels of fraud.

Vegas to LA was a standout with, I think up 15% level of all purchases, being fraud attempts on that route or something crazy like that. And I’m wondering, is that due to seasonality? Did that bloom around the springtime when people run to Vegas to get their impulsive, poorly thought out marriages done at the Elvis Chapel?  Or is that that way all year round?

There is a pricing mechanism per person that OTAs are trying to do, but when some customers see a $15 or $25 drop in a ticket price, they’ll just charge it back and go buy the cheap, cheaper ticket, and that ends up costing the OTA more money.

Cathy Ross, President and Co-Founder, Fraud.net: [00:08:02] Well, that particular route is pretty, fraudulent for OTAs year round because it is from one warm place to another place. There tends to be — and here’s what’s interesting about that — there tends to be more coupons. And I don’t know. but there tends to be more coupons and discounts revolving around that particular route.

And I don’t want to say, but maybe people that want to travel to Vegas tend to be a little bit more risk takers. So in that particular route, we don’t see that much seasonality.

David Zweifler, Fraud.net: [00:08:37] Oh, so it’s live by the sword, die by the sword. I mean, they’re, they’re going for impulsive people. And so impulsive behavior doesn’t raise flags.

Cathy Ross, President and Co-Founder, Fraud.net: [00:08:45] Yeah, I mean, it’s, we’re seeing that, well, I guess what I’m saying is there’s not as much seasonality around that. We see that as a constant high-fraud route where we do tend to see just more seasonality in the travel industry in general is, obviously, travel home over the holidays tends to be more. And we see more fraud going into South America. And it could be, to a large extent. because I believe that tickets are treated more like cash down there. Like it’s tends to be much more of a cash economy down there in general. and so we, we see a, just a lot more fraud there.

David Zweifler, Fraud.net: [00:09:27] In addition to routes, the report showed that, there were big disparities in fraud rates between carriers, with some of them just getting savaged.

Do you feel like some airlines just have a more sophisticated approach to fighting fraud, or do you think that certain airlines are particular targets because they have a  higher percentage of, expensive routes or something else?

Winners and Losers in Fraud Among Airlines

Cathy Ross, President and Co-Founder, Fraud.net: [00:09:53] I think that it depends very much on the routes. You’re right there. But it also, and I know this sounds weird, is that it might be Delta today and United Airlines tomorrow. And what happens is, is that we see fraud where people jump from airline to airline.

So it might be, let’s say, Delta has a vulnerability. They’ve written a rule that somebody has figured out and then they share these rules online by the way, I don’t know if you know, people know that is that they’ll go, okay, well Delta has a flaw that if you order insurance. And you’re buying over a $2,500 ticket that the, that’s the level that they don’t do a check. And so these are shared in chat groups. So you can see these things posted online.

And what happens is that eventually Delta will figure it out. And they’ll write a rule around it and shut it down. And what we’ll find is that the fraudsters just move on to another airline.

So while these airlines might be riskier today are experiencing more fraud today, eventually they will create a rule to shut it down.

And the fraudsters just move on. Fraudsters are like water, they just flow. They’ll flow, they share information. and they keep seeking where the vulnerabilities are. They find loopholes. Because a lot of the airlines are still using systems where they write rules. And when you write a rule, all you have to do is find where the target exceeds the rule or is below the rule.

It’s kind of like bank saying, if you deposit more than $10,000 it is going to be an issue.

David Zweifler, Fraud.net: [00:11:43] So  (money launderers deposit amounts totalling) $9999.99

Cathy Ross, President and Co-Founder, Fraud.net: [00:11:45] Exactly. And so it’s the same thing that ends up happening is that fraudsters are constantly looking for the loophole, and when they find one, they share the information.

There’s two types of fraud. And I think OTAs and airlines have to look at both.

Higher Credit Limits Mean Increased Fraud

David Zweifler, Fraud.net: [00:11:57] Moving to the payment sides of things. The wild fluctuations in fraud rates by card issuers is very interesting. What causes fraudsters to choose one type of card over another? Are there any known vulnerabilities that merchants can look out for when processing these transactions?

“OTAs should never ever accept a black card transaction!”

Yeah. no. I’m assuming that this just goes back to the idea that fraudsters are attracted to cards with higher credit limits so that the higher, so that there’s a higher potential payoff in the event of a successful, fraud attempt. Did I get it or is there more to it than that?

Cathy Ross, President and Co-Founder, Fraud.net: [00:12:39] That is dead-on. And you know, if you also notice that corporate cards, which tend to be questioned less tend to have higher fraud rates.

The higher credit limit cards tend to have a higher fraud rates. And what I will also tell you is that if you go on the dark web, those are the  (best) kinds of cards to purchase, right? You don’t want a credit card that has like a $500 limit. Like how exciting is that? Not at all. But a black card that has an unlimited, an unlimited credit limit and where the card issuer tends to not want to create friction with the card holder, stuff gets approved more. I mean, I’m going to tell you my American express Platinum card does not get rejected, whereas my  Capital One with $2,000 on it or my TD Bank account gets turned down all the time.

David Zweifler, Fraud.net: [00:13:38] That’s interesting. I didn’t, I forgot about the, the, the in, on the part of the, institution to flag those transactions and, face the righteous indignation of the highly affluent, buyer. You know, “I’m paying with a criterion card. Don’t you know who I am?!”

Cathy Ross, President and Co-Founder, Fraud.net: [00:13:58] Exactly.

David Zweifler, Fraud.net: [00:13:59] And they don’t

Cathy Ross, President and Co-Founder, Fraud.net: [00:13:59] want to cause problems with them…

Higher Risk Issuers Suggest Widespread Penetration

David Zweifler, Fraud.net: [00:14:01] Yeah, yeah.

Now, you noted in your report that there were financial institutions, card issuers that we’re seeing extraordinarily high fraud rates. What, what, what do you think’s going on there?

Cathy Ross, President and Co-Founder, Fraud.net: [00:14:14] I believe that many of the banks had been penetrated…

David Zweifler, Fraud.net: [00:14:21] Criminal or state  (sponsored) ?

Cathy Ross, President and Co-Founder, Fraud.net: [00:14:23] Not state. I believe that a lot of their cards are available for sale and block ways. Like I believe that a lot of them have had breaches. So what we’ve seen is we’ve seen full blocks come out of the issuing banks — full blocks — where 90% of everything there is fraud.

David Zweifler, Fraud.net: [00:14:41] This is David Zweifler for the FraudNet podcast. Today, I’ve been speaking to Cathy Ross, President of Fraud.net discussing the 2020 online travel fraud benchmarking report.

The benchmarking report covers trends in travel fraud, looking at the travel routes, the carriers, the cards, and the issuers that saw the most fraud in 2019.

Download a complete copy of the report for free.