Data Dive, Fall Chill Edition: Fraudsters, Sears And India’s Data Privacy Laws

L.A. fans traveling to Boston for the start of the World Series will want to pack — and possibly purchase for the first time — sweaters, as this week will be an excellent opportunity to enjoy New England’s crisp fall weather. And New England isn’t the only place enjoying the autumn chill as it sets in — although we are perhaps enjoying it more colorfully with the region’s famed foliage.

In payments and commerce this week, a fall chill also rolled through. Fraudsters have found a new favored method for the holidays, the Sears’ bankruptcy filing finally came in and the major card networks found themselves on the wrong side of India’s emerging data privacy efforts.

Gift Cards’ New Unfavorable Fans

In yet another addition to the “why we can’t have nice things” files, the Federal Trade Commission (FTC) released a report this week indicated that fraudsters love gifts cards to the extent that many are requesting them as a form of payment these days. In fact, they have favored brands, with iTunes and Google Play cards popular favorites.

The report excluded data on shop-at-home purchases and includes information about frauds reportedly directly to the FTC between January and September of this year. It turns out that gift cards are the preferred mode of payment for an increasing number of fraudsters — 26 percent last year. That is up from just 7 percent in 2015 — a 270 percent increase.

Consumers who are defrauded are generally instructed to purchase or reload cards at well-known stores like Walmart, Target, Walgreens or CVS in addition to the two app marketplaces. In all, losses to this emerging and increasingly occurring form of fraud reached $40 million in 2017, doubling the $20 million in losses reported 2015. As of September 2018, losses from gift-card fraud have hit $53 million.

The scammers in question have also broadened their application of gift-card fraud to a wider variety of cons. Generally gift card requests go along with tech support scams, but according to the FTC, scammers have broadened their horizons in terms of who they claim to be before requesting a gift card payment.

“They may pretend to be the IRS and tell people they cannot use other payment methods because of their delinquent tax status,” according to the FTC. “They may even call iTunes cards ‘payment vouchers.’ To avoid alerting store personnel, they often direct people to buy cards from several different stores, and they tell people not to talk to anyone about why they are buying the cards.”

Scammers favor gift cards, according to the report, as they are difficult to trace and relatively easy to spend or cash out.

Sears Throws In The Towel, Of Sorts

An unsurprising development, since it has been long predicted, but Sears made it official this week and filed for Chapter 11 bankruptcy after a long, precipitous decline.

The filling came with an announcement that Sears is gearing up to close an additional 142 stores.

According to the filing, Sears lists $6.9 billion in assets and $11.3 billion in liabilities on its balance sheet. The official white flag comes after years of attempted restructuring of the once iconic brand. CEO Eddie Lampert had long vowed to bring Sears back to its flagship days, but his efforts failed to take off with consumers. The chain has not turned a profit since 2011 — and Lampert has been criticized sharply for maintaining the store’s large physical footprint for too long while allowing the physical condition of individual stores to deteriorate. Sears did attempt to invest and push its online business, but had fallen out of favor with consumers who didn’t much take to its digital offerings.

Last year Sears sold off its Craftsman brand line of tools and is mulling an offer for theKenmore appliance brand.

Under the bankruptcy plan, Lampert steps down as CEO and will be replaced with a three-person committee, though he will remain as chairman of the board.

Mohsin Meghji, a managing director of the M-III Partners corporate advisory firm, was appointed chief restructuring officer, reported Reuters.

What comes next for stakeholders in Sears will very much depend on the appetite of creditors and suppliers to get the business running. The firm’s intention is sell assets and start closing the 142 stores that are not profitable by the end of this year. The reported goal is to reorganize the retailer around a smaller footprint of 700 stores. It will also sell off a large share of its real estate holdings — many of which are expected to be bought by Lampert’s hedge fund.

Sears and Kmart stores will remain open while bankruptcy proceedings go through, with employees getting paid wages and benefits.

“The company believes that a successful reorganization will save the company and the jobs of tens of thousands of store associates,” Sears said in a statement.

Sears also reports that it has received a $300 million financing package to fund its operations during the bankruptcy proceedings and that it is currently negotiating for another $300 million. Internal sources further say Lampert plans to contribute between $500 million and $600 million to a financing package for the retailer — though as of now those reports remain unconfirmed by Lampert.

In 1969 Sears was the largest retailer in the U.S. (a crown it held until Walmart knocked it off in 1991), it introduced the world to the Discover Card in 1985 and had over 4,500 U.S. locations at its peak.

Problems With India’s Privacy Law

Some major U.S. payments players are facing the cold shoulder from India’s government as they face fines for violating India’s data privacy laws.

According to reports, a new regulation that went into effect last Tuesday (October 16) requires payments companies to store all information about transactions involving Indian consumers on computers housed within the country.

However, a host of U.S. firms — including Visa, Mastercard and American Express, as well as firms like Amazon and PayPal — were unable to comply with the law’s effective date, and have requested additional time to comply with the order.

Issues in getting in line with the law seem to center on fraud detection and other data processing systems not being able to be redesigned quickly enough to work in India alone. The companies had offered to store copies of the Indian data in the country so that regulators, tax authorities and law enforcement could easily access them while they are working to comply in full with the law.

But the Reserve Bank of India (RBI) warned the firms that it was not disposed to exceptions or extensions, and that it would take action — including imposing fines — if they missed the deadline.

Mukesh Aghi, the chief executive of the U.S.-India Strategic Partnership Forum, admitted that the payments companies were frustrated with the regulators. “They refuse to sit down and have a discussion,” he said.

Spokesmen for Visa and American Express have declined to comment thus far, while representatives of Mastercard have said, “Compliance with local laws and regulation is a top priority for us in all the countries we operate in. We continue to work closely with the regulator towards this.”

The U.S. government is also going to bat for the companies, with U.S. Senators John Cornyn and Mark Warner, co-chairs of the Senate India caucus, sending a letter to India’s Prime Minister Narendra Modi urging him to soften his stance on rules.

“We see this (data localization) as a fundamental issue to the further development of digital trade and one that is crucial to our economic partnership,” the senators said in the letter.

What did we learn this week? Into every ecosystem a little cold air must blow from time to time — and this week was perhaps a bit too chilly for comfort for those worried about digital fraud, storied retailers in the digital world or the challenges of taking on the growing Indian commerce ecosystem. But things usually have a way of heating up again, and quickly.

We’ll keep you posted. Until then, have a great week — and Go Sox!