Internet Fraud and Corporate Losses
7 August 2007 Charlie Abrahams
The companies of today are suffering increasing losses due to the increase of internet fraud. Charlie Abrahams of MarkMonitor explains all.
The internet has changed the world in astounding ways – both good and bad, and all in the last ten to 15 years. We marvel at the good – instant access to even the most obscure information, free and secure worldwide person-to-person communication, and the ability to access almost any product or service with just a click or two.
But with its mass appeal and reach, anonymity and confusing technical underpinnings, the internet is easily abused by online fraudsters pretending to be companies or legitimate distributors of highly sought-after products and services.
In the physical world of retail stores and the local branch bank, knowing the source and authenticity of products was relatively easy. Unless you bought a watch from a street vendor in Leicester Square, you pretty much knew what you were getting, and companies could easily 'police' illicit activity. Not so in the world of the internet.
For pharmaceutical drugs, software, vehicle parts, luxury goods and more, 10% to 80% of online products are fake or otherwise illegitimate. For example, over 80% of online pharmacies are selling counterfeit and fake drugs, with unknown efficacy and safety.
The same is true of services. Who hasn't received a confusing 'phishing solicitation' from unknown people purporting to be their bank? The result is an explosion in identity theft and loss of online banking credibility. The costs run into billions of pounds.
We have all witnessed the increasing sophistication and frequency of these attacks. What began as simple cybersquatting ten years ago has evolved to brand dilution from malicious sites, diversion of consumer traffic to competitors, abuse of trademarks and famous names by 'domainers', sale of counterfeit goods and services, and identity theft by online criminals using the credibility of corporate names and famous trademarks to confuse and defraud customers.
While companies are spending more and more each year to fight these problems, the true costs of lost revenues and profits associated with online brand abuse are only just beginning to be understood.
COUNTERFEITING: A GROWING PROBLEM
According to the International Anti-Counterfeiting Association, counterfeiting is now a £300bn a year problem, growing 10,000% in the last 20 years from £2.5bn in the early 80s. This staggering increase corresponds to the rise of the internet and the widespread outsourcing of product manufacturing to countries like China where intellectual property law lags behind US and European standards.
For example, in the global marketing of high-tech IT-related products, KPMG estimates that sales of grey-market and counterfeit goods amount to about £70bn, of which 10% occur online. In the related world of software sales, over 35% of software installed on PCs is illegal, with over 85% of software sold on online auction sites being illegitimate.
In a Columbia University study, only 11% of online pharmacies were selling legitimate products, with the worldwide losses due to counterfeit drug sales estimated at £16bn and growing at 13% each year. Automotive industry groups cite 10% of parts are counterfeit, costing the industry £6bn a year, with over 10% online.
And in a final example, over 95% of Tiffany jewellery sold in online auctions is fake (source: Law.com), although this is not uncommon for luxury makers or watches, handbags and other high-value branded items.
THE INCREASE OF PHISHING
On the services side, financial institutions continue to struggle with the growing incidence of phishing, with 41% of all phishing attacks targeted at financial institutions (source: MarkMonitor Brandjacking Index™). As a result, the growth of online banking has stopped and even retreated in the last three years, forcing financial institutions to serve more customers using traditional and very expensive brick and mortar branches.
With over 150 million consumers in the US alone not using online banking services, the loss in profits to the banking industry is estimated by Javelin Strategy and Research to be £4.2bn annually.
If even 15% of this could be gained by increasing consumer's trust in online banking (which means controlling phishing attacks), this is still over half a billion pounds in lost annual profits.
THE WEB: WORTH THE RISK
With the advent of online advertising and the explosive growth of industry leaders like Yahoo and Google, companies are now projected to spend over £9.5bn in 2007 (source: eMarketer) using the efficiency of the web to talk with consumers.
Although verifiable data is difficult to obtain, some sources estimate that fraudulent advertising 'click throughs' are as high as 22% (source: Click Fraud Index). 'Domainers', who in part are profiting by registering misspellings and other variations of trademarked names, are estimated to pull in over half a billion pounds in 2007 (source: Forbes.com), much of which is from companies that are spending money for someone else to use their own trademarks.
RESPONDING TO THE CHALLENGE
Combating this multi-faceted problem is not easy, but there are some steps to consider.
Create clear focus and accountability: realise that this problem is emerging, large and multi-disciplinary. Dealing successfully with it requires a coordinated response from professionals in several departments which may include legal, IT, security, product management or online commerce business units. Make sure your company is clear about who needs to be involved and who will lead the effort.
Dimension the problem: once accountability is defined, clearly think through the costs associated with online brand abuse for your company. It is bigger than you think. Besides direct losses, consider damage to core corporate assets including brand equity and business reputation. Understanding the dimensions is essential to getting sufficient resources allocated to solving the problem.
Avail yourself with the latest tools to fight the problem: a number of companies now offer technologies and services to help corporations successfully fight these issues. Waiting for your customers to inform your company about specific abuses or 'googling' your brand names is not enough.
Be aggressive and keep at it: persistence pays off. Companies that actively police online brand abuse and respond to it make themselves unattractive to online criminals. For example, banks actively monitoring and responding to phishing attacks often experience a dramatic decrease in ongoing attacks as phishers seek out easier targets.