Big opportunities, bigger risks in booming health and beauty market

The health and beauty industry is one of the fastest-growing consumer markets in the world, according to a 2021 Statista Consumer Market Outlook report on beauty and personal care. And this growth won’t be slowing down anytime soon.

Statista’s report projects revenue in the beauty and personal care market to reach over $564 million in 2022 — up from $471 million in 2020. In total, the report expects the market to grow 4.76% annually through 2026.

E-commerce, social media, internationality, mass digital migration, and young consumers entering the market have all contributed to this growth. But they have also compounded existing fraud issues in the space and exposed the market to new ones.

From direct sellers to niche retailers, large direct-to-consumer brands, and subscription-based services, all health and beauty merchants need to know how the top fraud schemes affect their industry.

1. Influencer marketing increases promo code, affiliate links abuse

The most common channels for beauty brand discovery are ads and recommendations through social media platforms. On YouTube, for example, influencers generated 60% of beauty content views in 2018. However, the brands themselves prompted only 39% of beauty content views.

Engaging in influencer marketing on platforms like YouTube can be a wise strategy for brands. In 2020, beauty tutorial views on YouTube increased nearly 50%. Using promotional codes or affiliate links connected to influencers and social sellers can make this strategy more effective. But they also increase the risk of promo code and affiliate links abuse.

In promo abuse or affiliate links abuse, bad actors or customers abuse a business’s marketing campaigns by using promotional codes or affiliate links multiple times. For example, customers may use multiple email addresses and open several new accounts for one-time promo codes. And bad actors may manipulate codes and links to siphon commissions.

Influencers and social sellers may encourage friends, family, or followers to use their links to purchase products and return them once they’ve met their quotas. Similarly, fraudsters can use promotions to purchase products at discounted prices and then resell them at higher prices.

Influencer-connected affiliate links or promo code abuse is challenging to combat due to the volume of promotions on various channels and platforms. Left unchecked, this abuse can seriously eat into ROI, waste ad spend, and erode customer retention.

2. Amazon, fraught with resale fraud, sells 23% of all beauty products worldwide

Health and beauty merchants are particularly vulnerable to resale fraud. With resale or seller fraud, bad actors use stolen credit cards to purchase goods and then resell them on third-party websites like eBay and Amazon.

Fraudulent resale activity can amount to massive losses. One nationwide drugstore pharmacy recently tried to take down a group of criminals who they believed stole almost $50 million in goods from their stores over five years. The group targeted things like allergy medication and razor blades for resale on Amazon.

Health and beauty items are huge targets for this fraud type because they often have high-dollar resale value. And consumers typically purchase them on a recurring basis. For instance, consumers will generally repurchase things like perfume, skincare products, protein powder, and supplements throughout the year.

“A customer might buy a luxury handbag once a year,” says Brady Harrison, Senior Data Analyst at Kount. “But they need to buy face creams, serums, and formulas every six or eight weeks, even if a product is $200.”

While there is growing consumer awareness around fraudulent products on third-party marketplaces, Amazon still made $28.8 billion in global beauty and personal care sales in 2020. Third-party sellers made up 53% of Amazon’s beauty market that same year, according to a 2020 Statista report.

Since consumers purchase these items cyclically, they may be interested in getting the products cheaper or easier. That motivation is likely to lead them to unauthorized sellers on third-party marketplaces. Global shipping delays and supply chain issues have also compounded the problem and attracted more people to look elsewhere for out-of-stock items.

Fraudsters are known to dilute or alter products or sell expired, opened, or damaged ones on marketplaces. In addition to losing sales to fraudsters, merchants can also suffer brand damage from customers who purchase these products from unauthorized sellers.

As a result, customers may stop purchasing directly from a brand entirely. Or they may post negative reviews about their experiences or damaged products, causing further brand damage or dissuading future customers from buying from that brand.

3. Rapidly growing online sales increases risk of refund fraud

In 2022, online sales will account for 25.4% of total revenue in the beauty and personal care market, according to the Statista report. By 2025, online sales revenue is expected to reach 33%.

While increased online sales can be exciting, merchants need to be aware of the potential risk for increased refund fraud. Between 5% and 10% of in-store sales result in returns. But that figure can jump as high as 40% with online purchases, according to a CNBC news report. The often generous return and refund policies of health and beauty retailers add to their propensity for this type of fraud.

Refund fraud, also called “cargo loss,” happens when customers or bad actors seek refunds for goods they didn’t buy or don’t intend to return. Instead of a refund, they may also request replacement goods. Customers may keep extra items while bad actors resell them on third-party marketplaces.

To obtain a refund fraudulently, the bad actor may claim an order did not arrive, a package was empty or partially empty, or an item was damaged. If they try to return a product, the bad actor may attempt to return a cheaper, generic, or knock-off product.

“Most merchants focus on their chargeback rates, but they don’t realize that refund fraud is so costly that it can actually create more losses than chargebacks,” says Harrison. “Beauty retailers need to be vigilant in this area too.”

4. Subscriptions and recurring discounts increase friendly fraud

Health and beauty subscription boxes have seen significant growth in the last couple of years. Since 2015, total sales for the top beauty and makeup boxes have quadrupled, according to research from Bloomberg Second Measure. Many experts think this interest is here to stay and could be a lucrative area for revenue in the coming years, especially for direct-to-consumer beauty retailers.

Similarly, subscriptions through recurring discount codes on frequently purchased goods can also provide beauty retailers with an easy, assured monthly revenue stream. However, along with subscription-based goods and services comes high instances of friendly fraud.

Friendly fraud occurs when customers dispute purchases with their issuing banks or credit card companies, which results in costly chargebacks against merchants. Friendly fraud can be accidental or intentional, and it can account for a significant amount of all fraud losses.

“Subscription-based and recurring billing are magnets for friendly fraud,” says Harrison. “Customers may forget that they signed up for a subscription. Maybe they didn’t realize they purchased a subscription. Or they may have buyer’s remorse and don’t want the subscription anymore.”

Think, for instance, about offers to save 10% on recurring purchases like shampoo, protein powder, or cosmetics. Customers can forget about these subscriptions or not recognize them on credit card statements.

Perhaps a customer’s package is missing, or supply chain issues delay it. Maybe the item arrived damaged, or it’s just not the right color. Instead of requesting a refund or resolving the issue with a merchant, customers may dispute the transaction with their bank, resulting in chargebacks.

5. More digital offerings expose retailers to digital payments fraud

Health and beauty merchants are increasingly migrating to digital purchasing channels like the web, mobile, and social media. They’re also beginning to accept more digital payment methods. While both are smart moves to meet consumers’ needs, they open retailers to digital payments fraud.

In digital payments fraud (or criminal, third-party fraud), bad actors use stolen payment methods on unauthorized purchases. According to the Statista report, in 2022, 56.6% of users will shop for health and beauty items through mobile devices. And 43.4% will shop through the web. By 2025, those numbers will rise to 63.6% and 36.7%, respectively.

This increase in online shopping leaves merchants vulnerable to more digital payments fraud. According to the FTC, online shopping accounted for $246 million in reported losses from consumers in 2020.

Fraudsters may target new digital channels or payment methods like Apple Pay, buy now pay later, contactless payments, or even cryptocurrency to make purchases using someone else’s information.

With digital payments fraud, merchants assume liability. So if a fraudster were to use a stolen credit card to purchase something through a website or mobile app, the merchant is responsible for those losses. This is different from a physical, brick-and-mortar location where liability is on the cardholder’s bank.

6. Health and beauty network marketing models are vulnerable to new account fraud

New account fraud is not unique to the industry, but health and beauty retailers may see it increase in the coming years. In new account fraud, bad actors use stolen or false names and email addresses to open accounts to take advantage of sign-up, referral, or free-trial bonuses.

Direct sales and network marketers within the health and beauty space are particularly susceptible to this kind of fraud. Bad actors often create new accounts to snap up merchandise through sign-up promotions that they then resell to customers or other direct sellers on third-party marketplaces.

In addition to the profit from reselling stolen merchandise, fraudsters also receive a commission from the parent company. As Harrison puts it, bad actors will exploit any business model that offers commissions through sign-ups.

Considering over half of direct sales consumers lack confidence in direct sales purchases, according to new direct sales statistics, these companies would be wise to take fraud prevention seriously. New account fraud can become a major pain point for retailers as more beauty direct sellers gravitate online. It can seriously drain revenue from lost products, brand damage, and wasted sign-up incentives.

How to mitigate growing fraud risks in the health and beauty industry

Kount Command is an AI-driven fraud prevention solution that uses unsupervised and supervised machine learning to analyze historical and emerging trends to determine transactional risk.

It uses robust email insights and billions of data points from a global network to deliver identity trust decisions in real time. This solution can detect and stop fraudulent activity from promo code and affiliate links abuse, digital payments fraud, new account fraud, and more without adding unnecessary friction to the customer journey.

Meanwhile, a dispute and chargeback management software solution can help thwart friendly fraud. This solution notifies merchants of chargebacks in real time, so they can help customers recognize purchases, communicate the status of a refund, and more.

Both solutions are customizable and allow businesses to customize their fraud policies. In addition, businesses without robust fraud teams or data analysts can use Kount’s chargeback guarantee and professional services for in-depth performance analysis and ongoing fraud policy management.

Together, these solutions help businesses of all health and beauty industry models protect the entire customer journey. And because they use AI and machine learning, health and beauty merchants can get ahead of future fraud and avoid reactive fraud rules.

Protecting the entire customer journey is the only way to ensure that beauty merchants have complete fraud security online. Overall, the right solutions reduce friction, capture more revenue, and allow beauty brands to provide the best customer experiences.