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Tracker® Was Done in Collaboration with and Supported by Paypal, and PYMNTS Is Grateful for the Company’S Support and Insight April 2021 FE AT U R E S TO RY_ P.0 6 Kendra Scott on tapping AI to fight AI-equipped fraudsters NEWS & TRENDS_P.08 DIGITAL Unauthorized transaction fraud jumped 462 percent in Singapore over the past year DEEP DIVE_P.12 How merchants deploy AI to fight AI-powered fraud FRAUD_® TRACKER DIGITAL FRAUD_® TRACKER 03 What’s Inside A look at recent digital fraud developments, including how AI is augmenting a surge in fraud brought on by the pandemic 06 Feature Story An interview with Jim Dunlap, chief information officer for jewelry and home goods retailer Kendra Scott, on how fraudsters are launching AI-enabled attacks during the pandemic and how merchants are fighting back with AI- based countermeasures 08 News & Trends The latest worldwide digital fraud headlines, including a 462 percent increase in authorized transaction fraud in Singapore and why SMBs have been hit by 2.3 times more fraud attempts than large corporations 12 Deep Dive An in-depth analysis of how fraudsters leverage AI to stage their attacks and how businesses can deploy adversarial training to counter them 14 About Information on PYMNTS.com and PayPal Acknowledgment The Digital Fraud Tracker® was done in collaboration with and supported by PayPal, and PYMNTS is grateful for the company’s support and insight. PYMNTS.com retains full editorial control over the following findings, methodology and data analysis. © 2021 PYMNTS.com All Rights Reserved 2 WHAT'S INSIDE Digital fraud continues to be a problem for New hacking and scamming technolo- banks, retailers, merchants and businesses gies that leverage artificial intelligence (AI) of all types, as well as their customers. The and machine learning (ML) are further aug- Federal Trade Commission (FTC) recently menting the risk of fraud. These automated reported that it received more than 2 million tools are well-known in the fraud preven- fraud reports in 2020, clocking total loss- tion community for their ability to identify es due to fraud at a staggering $3 billion. and stop fraud attempts, but fraudsters also This is a sizable increase from the nearly use them to advance their schemes. Some $2 billion in reported losses that occurred bad actors deploy AI to devise wholly new in 2019. The true number of fraud incidents schemes, while others leverage this tech- and losses is likely even greater due to the nology to simply scale up their previous tendency of fraud to be underreported. More methods. An AI-powered program can create than one-third of individuals filing fraud re- and send thousands of phishing emails in the ports with the FTC said they lost money in same amount of time it takes a fraudster to these attacks. write one by hand, meaning that AI-powered bad actors can be thousands of times more Fraud is nothing new, as almost half of all dangerous. businesses report being hit with online fraud over the past two years, but it has been New AI- and ML-powered fraud prevention given a shot in the arm by the ongoing pan- measures like adversarial training are al- demic. Public health concerns and economic ready springing up to help fight these new anxieties have given fraudsters ample oppor- schemes, but many smaller businesses can- tunities to take advantage by posing as tax not afford these advanced preventative officials or public health experts and prom- tools. Fraud prevention companies will have ising stimulus checks or early vaccine access to devise ways of making these techniques in exchange for personally identifiable infor- more economical without compromising mation (PII). Americans lost $145 million to their effectiveness to truly make a dent in pandemic-related fraud as of September the increasing value of digital fraud losses. 2020, and that number is continuing to climb as the pandemic wears on. © 2021 PYMNTS.com All Rights Reserved 3 GLOBAL DIGITAL FRAUD DEVELOPMENTS For more on these stories and other digi- One type of fraud commonly augmented by tal fraud developments, read the Tracker’s AI use is unauthorized transaction fraud, News and Trends section (p. 8). in which bad actors leverage bots to ob- tain stolen payment information en masse HOW eCOMMERCE MERCHANTS FIGHT FIRE and make automated purchases. This type WITH FIRE WHEN IT COMES TO AI of cybercrime skyrocketed by 462 percent in Fraudsters’ attacks have grown more so- Singapore over the past year, and fraudsters phisticated than ever, with cybercriminals deployed automated phishing schemes to deploying AI-based systems to augment gather information necessary to the scam. phishing, spoofed email attempts, ransom- Singapore’s transport minister warned con- ware scams and other schemes. Fighting sumers that banks and businesses will never these attacks often means merchants must ask for PII and that any such request is likely deploy AI-based anti-fraud measures, but the work of a fraudster. such systems should not be utilized in a vacuum. In this month’s Feature Story (p. 6), Account takeovers (ATOs) are also experi- PYMNTS spoke with Jim Dunlap, chief infor- encing an AI-related boost, as they spiked mation officer for jewelry and home goods by 282 percent between 2019 and 2020. The retailer Kendra Scott, about how AI and hu- eCommerce and online gaming fields were man analysis can be leveraged in tandem to particularly vulnerable to such attacks, with fight AI-wielding fraudsters. bad actors using credential stuffing and script creation methods to stage ATOs at DEEP DIVE: HOW MERCHANTS DEPLOY AI TO scale. Fraud prevention experts recommend FIGHT AI FRAUD biometrics, multifactor authentication (MFA) and bot detection systems during the ac- AI can be a potent weapon in the hands of count creation stage to authenticate users fraudsters, with bad actors using it to both and prevent AI-powered ATOs. develop new attack methods and deploy tried-and-true techniques at scales never Small to mid-sized businesses (SMBs) are before seen. It can also be used effectively in particularly vulnerable to AI fraud because the hands of fraud prevention teams — espe- they lack the seasoned fraud prevention cially when leveraging adversarial training, a algorithms and analysts available at larg- process in which an ML model is trained us- er organizations. A recent study found that ing real fraud examples. This month’s Deep SMBs have been hit by 2.3 times more fraud Dive (p. 12) explores how corporate security attempts than large corporations and that teams are working on adversarial ML tech- one-fifth of these fraud attempts related niques to fight fire with fire when it comes to the ongoing pandemic. Employees work- to digital fraud. ing from home helped create entry points for fraudsters, who leveraged these openings to scam companies and their employees. © 2021 PYMNTS.com All Rights Reserved 4 AI FRAUD Artificial intelligence FIVE augments both rapid-fire FAST fraud and product scalping FACTS UNAUTHORIZED TRANSACTIONS Singapore experiences more than fourfold growth in unauthorized transaction fraud within the past year ACCOUNT TAKEOVERS AI techniques like SMBs credential stuffing and script creation lead Small businesses are hit to a surge in account with more than twice as takeovers many fraud attempts as large ones BLACK FRIDAY There have been more than 4 billion fraud attacks since Black Friday 2020 TRACKER® © 2021 PYMNTS.com All Rights Reserved 5 FEATURE STORY Kendra Scott On Tapping Kendra Scott has faced numerous AI-bolstered online attacks aimed at ex- AI To Fight AI-Equipped ploiting customers’ economic insecurities Fraudsters over the past year, but it has fought fire with fire by deploying AI-based countermeasures Digital fraud has threatened merchants since of its own. the advent of eCommerce, but it has been especially pernicious over the past year as EVOLVING FRAUD THREATS DURING THE the pandemic and economic downturn leave PANDEMIC businesses and individuals vulnerable. Fraud Fraudsters who harness AI typically lever- rates have increased by 55 percent since the age two types of attacks: They develop new health crisis began, and retailers are devot- scams that capitalize on AI’s capabilities or ing as much as 10 percent of their annual use the technology to launch schemes at an budgets to fraud prevention — understand- unprecedented scale. The fraud techniques able, given that some reports estimate that that Kendra Scott experienced over the past up to 70 percent of all traffic on eCommerce year have largely consisted of the latter, with checkout pages is generated by fraudsters’ the retailer facing an unprecedented quanti- bots. Retailers are also favored targets for ty of familiar attacks. growing numbers of AI-wielding cybercrimi- nals, however, and AI-based fraud schemes “Common threats now on the rise are phish- threaten to derail even merchants’ most re- ing, spoofed emails and ransomware,” Dunlap cent efforts. said. “We have seen a doubling in the vol- ume of threats between the beginning of [the Jewelry and home goods retailer Kendra Scott pandemic] and today, with no relief in sight. is well-aware of the dangers of AI-powered … The sophistication of fraudsters is increas- eCommerce fraud. The company, which ing and, consequently, their tools of choice started as a one-woman operation in 2002 are also far more complex than in the past.” and has since grown to include 75 stores, has been forced to rely on online sales during the These fraudsters can also cause reputation- pandemic, despite the fraud risks. al damage in addition to stealing funds and data, regardless of whether the attacks suc- “One of our top priorities was to create a way ceed. Customers are often reluctant to do for customers who shop our stores to con- business with companies that they believe nect with our associates digitally,” said Jim have subpar security, so even failed fraud at- Dunlap, Kendra Scott’s chief information of- tempts can do harm.
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