If you follow technology, there’s a good chance that you’ve heard of the so-called “Metaverse,” a concept that some think will be as disruptive as the World Wide Web. While the Internet now powers communication and has revolutionized the global economy, it has also presented opportunities for fraudsters targeting consumers and merchants. Unfortunately, those same fraudsters are probing the Metaverse for its weaknesses, and it’s only a matter of time before they succeed there as well.
The Metaverse was first coined in “Snow Crash,” a cyberpunk novel published by Neal Stephenson in 1992. Stephenson envisioned the Metaverse as a sort of Internet you could experience, rather than one you simply view on a screen. You’d have an avatar in the Metaverse, and you could buy digitally built property, go on dates, or otherwise live life on the web. If you’ve ever watched Ready Player One (or read the novel), you’ve seen a more recent take on what a Metaverse could look like.
Many thought leaders believe that the Metaverse is the next step and a huge opportunity. Yet while the World Wide Web has proven to be a huge boon for proactive merchants and other businesses, it has also enabled hackers and scammers. Unfortunately, the Metaverse too may offer opportunities for criminals.
Already, fraudsters are using stolen credit cards to make purchases online and to engage in other illegal activities. Hiding behind screens and often operating across international borders, fraudsters are difficult to track down and punish. Unfortunately for merchants, scammers are a serious threat, often stealing products and data, resulting in security breaches, chargebacks, and various other issues.
The Evolution of the Internet May Hint at the Future of the Metaverse
We’ve already seen the Internet undergo rapid and remarkable change. Go back thirty years and the Internet was a much different place. Back then, Internet connections were far too slow to support streaming music, let alone videos, and many websites were simple, static pages. E-commerce found its roots in the early days of the web, but wouldn’t become mainstream until the late 1990s as Ebay, Amazon and Paypal came to the fore.
Online merchants quickly became a favorite target for scammers. In some cases, scammers steal credit cards and use them to make unauthorized purchases. Other times, seemingly legitimate shoppers using their own cards engage in first-party fraud. Using the chargeback process, a shopper can purchase something online, then claim that the order never arrived, or that they received items not as described. Then they can ask their bank, not the merchant, to reverse the payment. Sadly, many fraudsters do precisely this.
Unfortunately, criminals will find ways to scam merchants and consumers in the Metaverse. That said, merchants can already use various tools and methods to reduce fraud online. While initially developed for the traditional Internet, many of these tools, like dispute management platforms, will still be useful in the Metaverse. Let’s take a closer look at the Metaverse, the opportunities it may provide, and also some of the risks for fraud.
The Metaverse Will Disrupt Engagement
Right now, much of the attention directed at the Metaverse has been focused on digital assets, say clothing your avatar wears or a digital house. Already, people will pay a lot of money for digital outfits or “skins” in video games. Scammers will likely target these digital assets. However, they won’t stop there.
People will also be able to buy real-world physical goods through the Metaverse. Let’s say a customer wants to try on some jackets. Instead of heading to the local shopping mall, he can hit up the Metaverse. Using an avatar that matches his body and digital versions of jackets that match the real world jackets, a customer can try things on from the comfort of home. Then the products will be delivered to the customer’s home.
Ideally, the Metaverse will benefit both customers and merchants. The customer can try something on virtually to make sure it fits and looks good before handing over their money. Merchants will not only get more customers, but they may see less returns as customers test products and make sure everything checks out before they buy.
Unfortunately, however, the Metaverse may also open up new (and old) avenues for scammers to work their racket. Let’s take a look at how criminals can exploit the Metaverse for fraud.
Fraud in the Metaverse
While many thought leaders working on the Metaverse are striving to close security gaps and mitigate risks, everything is hackable. Many of the methods scammers use may resemble tactics used today, like chargebacks. However, scammers will likely uncover new opportunities and will level-up old strategies to take advantage of the Metaverse.
Quite simply, if money is exchanging hands, there’s a good chance that someone will try to figure out how to steal some of it. Unscrupulous merchants might sell counterfeit physical and digital assets through the Metaverse, for example. Or customers might stop by to shop virtually at your Metaverse store, buy some goods, and then use chargebacks to claw back their money.
The Metaverse may give rise to new payment methods or could make cryptocurrencies as payment more popular. However, many Metaverse companies will likely rely on traditional payment methods, such as debit and credit cards. This means conventional threats, like chargebacks, will still be a grave risk.
Chargebacks Will Remain a Serious Threat
With a chargeback, a bank can claw back money from merchant. The bank then sends the money to the cardholder. Importantly, card issuers can do this without the merchant’s permission. In the U.S. and many other countries, chargebacks are enshrined into law. Used properly, chargebacks protect legitimate customers and make shopping with credit and debit cards safer.
Unfortunately, however, some cardholders will engage in first-party fraud. Let’s say someone swings by your Meta retail store, tries some clothing on and orders three shirts. The merchant fulfills the order correctly and the products are delivered. But the customer then files a chargeback with their bank.
Why? Quite simply, they’re hoping that the bank will process the chargeback. If so, they’ll get their money back and they’ll also be able to keep the shirts they ordered. First-party fraud is already common with online shopping and will remain a serious issue in the Metaverse as well. Fortunately, merchants can use chargeback alerts, dispute management platforms, and other tools to fight chargebacks.
Not all chargebacks stem from first-party fraud, of course. Currently, fraudsters can steal credit cards and take over accounts (say an Amazon profile) to then make unauthorized purchases. As the Metaverse shapes up, it may offer fraudsters new opportunities to steal IDs, take over accounts, and misuse stolen credit and debit cards.
Identity Theft Will Likely Continue to Rise
Another major Metaverse concern is identity theft. As the Metaverse grows and advances technologically, we may rely more on digital avatars and identities. Already, identity theft is a major threat to consumers with the U.S. Federal Trade Commission (FTC) handling over 2 million fraud reports in 2020 alone. For customers, identity theft can lead to lost money, a negative impact on credit reports, and other issues.
Merchants too suffer from identity theft. If a fraudster uses a stolen ID and payment credentials to purchase something from a store in the Metaverse, that merchant may have to bear the cost. Once the fraud is discovered, the legitimate account holder will likely file for a chargeback. From there, the card issuing bank will likely claw the money back, forcing the retailer to suck up the losses.
There are a variety of tools available to reduce the risk of identity theft. However, most of these tools were built to mitigate fraud on the World Wide Web. It remains to be seen if our current fraud tools will prove sufficient for preventing identity theft in the Metaverse. Quite likely, current tools will either need to be adapted to the Metaverse, or new tools will need to be developed.
Fighting Fraud in the Metaverse
The Metaverse is still a relatively new concept. Yes, fiction writers and technology thought leaders have been talking about the Metaverse for many years. But only now are concepts being built and explored. As the Metaverse evolves, criminals will target it to commit fraud. In response, companies, along with tech and security experts, will develop methods and tools for fighting crime.
One already popular method to crack down on illicit transactions is the blockchain. A blockchain is essentially a ledger that tracks every transaction. Often, this ledger is made public, providing increased transparency and allowing everyone to monitor exchanges. Already, the blockchain has been implemented to support and track Bitcoin transactions. It’s also used by many other cryptocurrencies.
Startups and mainstream financial institutions are also exploring methods for using the blockchain in more traditional financial transactions. The blockchain will likely play a role in Metaverse. Cryptocurrencies using blockchain may also have a major part to play.
Still, while the blockchain may increase transparency and reduce fraud in some areas, it’s far from infallible. Account takeover is still a major risk and if a fraudster takes over an account, they may be able to make transactions or steal funds. Often, once a transaction is made in the blockchain, it’s irreversible. Thus, while the blockchain may reduce some risks, it’s not a cure-all.
Paradigm shifts can impact financial systems. Debit and credit cards, for example, have become more popular in the age of the Internet. This is due, in part, ease of use. It’s easier to pay online with a credit card rather than cash or a check. Right now, the Metaverse is a nebulous concept. While traditional payment methods, say credit cards, will likely remain popular, new payment methods may also emerge.
From Pre-Authorization to Post-Authorization and Beyond, Meta Merchants Must Fight Fraud
Chargebacks will also remain a major risk in the Metaverse. This includes both first-party fraud (fraud committed by the legitimate cardholder) and fraud stemming from account takeovers and stolen identities. Pre-authorization tools are becoming more sophisticated and can help merchants stop fraudulent transactions before funds and merchandise exchange hands.
That said, pre-authorization tools won’t prevent all fraudulent transactions and some illicit transactions will still go through. First-party fraud, in particular, is hard to prevent. Still, merchants can use a variety of post-authorization tools to deflect, manage, and win disputes and chargebacks. Almost certainly, chargebacks will remain a serious threat in the Metaverse.
With chargeback alerts, a merchant can often deflect chargebacks. Once alerted, a merchant may be able to provide new information to resolve the brewing dispute. For example, clarifying billing descriptors or providing shipment tracking data can clear up misunderstandings. Merchants can also issue preemptive refunds, thus avoiding chargeback fees and a rising chargeback ratio (which, in turn, may raise payment processing costs).
If a dispute is unavoidable, the merchant can use tools to increase their chances of successfully winning disputes. If a customer claims they never authorized a purchase or never received their goods, IP addresses and shipping receipts may provide the proof needed to win a chargeback dispute. These tools will still be effective in the Metaverse.
Merchants Who Ignore the Metaverse Do So At Their Own Risk
Some merchants may look at the Metaverse and decide simply to not offer products and services through it; why put up with the risks of fraud and increased complications? However, as the Metaverse evolves, it’s likely that more and more consumers will engage with it. Those businesses that ignore the Metaverse will miss out on opportunities.
Some merchants avoided the Internet for similar reasons. Online fraud, including chargebacks and stolen IDs, was and is a major risk. However, consumers have increasingly turned to the Internet while many brick-and-mortar retailers have faced slow growth or even declining engagement. Many of the biggest and most successful companies today, like Amazon, were early adopters engaging with online opportunities to disrupt markets.
Quite likely, the Metaverse will prove disruptive as well. And those businesses that pursue meta opportunities may enjoy the strongest growth and success.