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Welcome to True Fraud. I'm your host, Pablo Torres. And today, we're gonna talk about the landscape, the risk landscape in Japan and how it affects or, has made fraud evolve in the country. I guess we can start very easily talking about a little bit of of statistics. Last year for 2024, Japan declared that there was a a loss related to fraud and scams across the country that was worth 54 billion yen, which is a huge amount.
Pablo Torres:It is actually the highest that it's been in 10 years. And if you look at the statistics, it has just been going up and up and up every year. It's very interesting when you start looking also at how it's a reflection of the the demographic of the country. There's currently a growing gap between generations or between different demographics in the country. So when we're thinking or when we're talking about this, I'm referring to there's a higher population of elderly people or people that are getting into that stage of their life.
Pablo Torres:And then there's a gap. And then there's a younger demographic, which means that there's likely generations that are either reduced in size or basically don't exist. So when you have a country like Japan that is very heavily based on values and they are sort of an honor and, they have very strong principles encoded in in their culture, and you are missing those generations that basically bridge that connection between each other, then some of those values start to disappear. And so the newer generations that would see the value and they they would pay respect or they would see the beauty on some of the things that are part of the culture in Japan are looking to the other side. Right?
Pablo Torres:They're they're basically not paying attention to those. Those values are not being transmitted because they're not interested in in dealing with that elderly crowd. The the disrespect that I'm talking about is more towards the the disrespect of the values that the culture carries. Right? Whereas the older generations would see honesty as something that is highly valuable and and something that carries a lot of, weight in their within their community.
Pablo Torres:The younger generation is influenced by social media and and, you know, there's there's this drive from the younger generations to absorb some of the North American culture, whereas, you know, like, the old the older generations in Japan, they they have a lot of pride in the culture in their country. Right? And so when you start looking at at this newer generation that has access to all of this technology, they're looking at all of these things on social media, then they also want to have they want to participate in that. And they want to be able to drive the fancy cars, and they want to be able to wear the clothes, you know, and and and go to the to the restaurants and the places that that are promoted, have that lifestyle that basically they consume on their screens every day. And so when you paint that picture and then in addition to that, you start looking into, the drive of the newer generations into including technology into their everyday life and then the disconnect from that generation and the older generation that basically hasn't had the opportunity to make that connection with technology, then there's a very big gap.
Pablo Torres:And there's a lot of, market, if you wanna call it that, or maybe a lot of opportunity for this younger generation that doesn't carry the same values or sees respect as with the same weight as this older crowd. There's because of this gap, then there is a much higher opportunity for the younger generations to abuse the older generations. There's, you know, there there's a lot of people in Japan that, you know, like in every country, they're looking for a partner. They're looking for companionship. And so the romance scams are growing rapidly.
Pablo Torres:There's all sorts of scams right now actually happening across the country, and this is what's driving, some of that, 54 billion number. Right? And so because of that, then there's newer groups that are moving into this new category or this this new industry. And there's a lot of jobs, for example, that are being posted as legitimate jobs. But the way that they are phrased or the way that they are portrayed are basically jobs that are basically jobs that are about stealing data or taking information or cloning cards, things like this.
Pablo Torres:You know? It's kind of like the integration of of that first step of the cycle of the credit card fraud and just getting them into into that market. A lot of them are not even aware that that's what's happening. They're just seeing, like, this is a job, and this is paying me probably better than a lot of other jobs. And and it's not until later when they are being charged or if they are, discovered that, that they see the the the issue with that.
Pablo Torres:If you go through the articles that are being published around this, it's the majority of the people that we're talking about are kids, like, 16, 17, 18, 19. You know? It's a very young crowd. They're they're very vulnerable. At the same time, I see that as as being as a result of this code of honor, I guess, that the older older generations go by that there is a lot of trust in the in in the culture.
Pablo Torres:It it it's a culture that hasn't that hasn't been, I guess, if you wanna use the word poisoned, then it hasn't been influenced by too many negative aspects from anywhere else around the world. Right? And so when things like this come across, people are more vulnerable to to to these these type of scams, I guess, which is concerning. And this, as a as a result of it, has turned into the banks in in Japan being required to turn on, 3D Secure 2.0 . And I believe, if I'm correct, most banks need to be compliant on it by March of this year. It is interesting, because if you think about it, there's an introduction to a new step on your checkout flow inthat a market that when you have a younger generation, they're gonna understand it really quick.
Pablo Torres:But then you have this older generation that maybe hasn't is not as, you know, comfortable with technology, let's say, or with online payments. And there is there is a growing concern, of course. Right? So when the majority of your population is post certain age, then that's gonna be your main market. And so when you're implementing changes to to your checkout flow and they are not gonna be ready for it, then you can imagine that most merchants are gonna say, well, do I really need to take this step?
Pablo Torres:Do I really need to implement 3d s 2? And right now, initially, I don't think that there's any any sort of fine or or any any concerns in regards of what happens when merchants don't comply with it. You know? That they're moving in that direction because of this growing gap or this growing bill of, you know, 54 billion yen in fraud. This this new ruling of of 3 d Secure 2 affects both banks and businesses.
Pablo Torres:So the businesses, when you're buying something online, you need to you need to be able to to handle that that protocol. Right? You need to be able to to send that code or that one time password to to the buyer. But then also the bank needs to be able to handle that response from that challenge. And so it's it's kind of across the board in the in the ecosystem.
Pablo Torres:You know, I I I've been educating myself on this, just trying to understand what has been the reaction from a lot of these businesses. There's been a lot of attacks on existing existing businesses to the point where it it is I don't wanna say funny, but it it's it's also kind of concerning that there's a lot of things that are happening in that country that they are that these businesses are just getting exposed to. One of the articles that I was reading was how there is this merchant, and they they suddenly had a spike in sales. And when they were looking at their Google Analytics, they they couldn't really see more traffic. Like, there wasn't a spike of traffic into their website.
Pablo Torres:It was just a spike of transactions, which in the moment, they thought, that's interesting. And then they just kept going. They shipped the orders and whatnot. And then, the police called them because they were trying to get some answers on one transaction. The owner of the business didn't think much of it because they never dealt with it.
Pablo Torres:Right? They they would be there would be 1 or 2 transactions here and there. No problem. You know? It's not a significant loss.
Pablo Torres:And then suddenly, there's this disparity between the the traffic that they're supposed to be dealing with and then the spike in transactions without even noticing the or paying attention to the metrics because that business and like a lot of other businesses and I'm and and I'm not limiting this just to Japan, but across the the world, there's a lot of businesses that don't see the value into having a fraud engine or some sort of fraud tool that would help them identify these anomalies. Right? They're just seeing the spike in sales, and they're thinking, hey. This is great. They're not able to tie it together to, hey.
Pablo Torres:There's no more traffic in our website. How come we're seeing so many transactions? And the transactions were of low value. So likely what the the people that were driving that spike in volume were verifying that the cards that they purchased in the in the dark web were still valid to be used elsewhere, right, which happens a lot. I mean, Apple, I think, a few years back, they were having issues with cards being issued to buy a single song that was 30ยข because that was the best way to verify that the card was still had hadn't been reported lost or stolen.
Pablo Torres:So when you're when you're in a culture like this where everyone is, you know, I don't wanna say that everyone is very trustworthy and, you know, everything is is good and and dandy. But when you have, you live in a in a culture where everyone is respectful and everyone is doing their best and behaving their best, and then you have this this, you know, dark cloud of fraud kind of looming over, the culture, then if you haven't been exposed to that, you don't know how to react. And and I think that's that's what, what's happening a lot, in Japan. Right now, if you think about it, when you're putting in perspective the implementation of, 3 d Secure 2.0 into a market like that, then I think there's been a a little bit of a disregard. And and this is my personal opinion.
Pablo Torres:There's been a bit a bit of a disregard as to how is that gonna impact the success rates for those merchants. Right? If you haven't educated the population properly on how to use a tool like that, then you're gonna start seeing very negative results. And that's just gonna affect the economy. I had the opportunity to go to Japan, I think it was, I don't know, 3, 4 years ago, right before the pandemic, actually.
Pablo Torres:And you could find a champion, sweater, just regular sweater, that you would you could find here at maybe Costco or something like that, and it would be $300. And so there's there are things like that. And and that's what I'm talking about with this new demographic is willing to pay the price to, assimilate certain aspects of different cultures. The street market picture or landscape in in Japan is actually growing quite a bit. There there there was a time when there were a lot of street markets.
Pablo Torres:A lot of the the activity of the the economic activity of the country was done with within these markets. Somehow or for for some reason, a lot of them started disappearing, and I think it has to do with the growth of the the cities. Right? Like, where are you gonna put this when everything is so busy? But then there seems to be a bit of a of a comeback.
Pablo Torres:And and, absolutely, those places would be, one of those where where you would be able to sell those things. In addition to that, keep in mind that, you know, everyone has a phone in their hand, and there's there's online markets, right, basically. Another thing to note is that the Japanese economy is is very much a a cash economy. And so if you wanna use credit cards, for example, it's normally for higher value transactions, you know, paying for hotels, paying for, you know, a nice dinner or or, like, specific fashion items or things like that. Otherwise, you know, if you're just walking down the street and you're buying something, a lot of places will actually not let you use credit card.
Pablo Torres:You'll have to there's a limit. Right? Because there's fees associated to it. And and because it's it's a very cash based economy, then the people that are looking for access to this credit card information, then they're going a different route, which is always gonna be the dark web or there there might be some specific business types that, will have a higher volume of credit card transaction sales. And then, they will target those those vendors and try to either clone the the the cards by installing some sort of, device or, just get access to their database.
Pablo Torres:I mean, I I think Japan is a now it's it's a very international country, if you wanna call it that. There's a a high traffic of of tourists now there, and there's actually a a lot of people that are moving there because it's it's becoming attractive. Right? And so when you have different cultures that are going in and they are kind of, like, injecting their own, you know, values, then it it kind of shifts things around. There there's economic factors.
Pablo Torres:I mean, I think there Japan, a lot of their manufacturing, is also tied to China, and China is in the Japanese economy. A lot of people are kind of, focusing now on, like I said, living in the in the hubs, right, which leaves the rest of the country kind of also vulnerable. And then this concentration of people in in these massive cities, then it also kinda lowers the the supply of of jobs that are available out there. Right? So people are kind of starting to to take what they can find.
Pablo Torres:But then there's also the the balance of this that demographic, the working demographic is also disappearing. So it's kind of like a, you know, a cat and mouse situation. But, yes, the the economy in Japan is gets a lot of pressure from from, other countries and specific manufacturing countries. The the 3 d Secure 2 commentary is not targeted in a negative way way or anything like that. It's just this is just what's happening in the country.
Pablo Torres:I think a lot of businesses, would benefit from it. A lot of people the market is moving in that direction regardless. Even then, the government, is suggesting or inviting people to, especially business bulletproof. Right? And so if if businesses start educating themselves on how it works, what is the protocol, what's the data that's being handled during the request and the challenge that's presented to the buyer, then the buyer the the seller will have a much better understanding on how they can protect themselves.
Pablo Torres:In the end, the the three d Secure 2.0 name of the game is to be able to push the liability back to the issuer. And if people don't know how to use it and how to protect themselves for fraud, then that action, that measure that the government is trying to to push, is not gonna be effective. Maybe the economy in Japan might not be, what it was a few years ago. It is it is a market that has been hasn't been exploited. Being able to to target a market like that where there's an an up and coming demographic that's interested in ecommerce, they want to wear the things, they want to go to the places, they want to drive the cars and and have that lifestyle.
Pablo Torres:I think it's indicative of of a to a certain degree of a growing economy or at least a subsection of that economy that's growing and that that can be targeted. If you you have a business, you being going into that market and understanding the growing concerns from the government on that regard and then just going into it and targeting it, but being prepared for it, you know, with understanding of 3 d s 2, for example, if you were required to to implement it. It is it is a market that's available. And and if you can go in and you have a fraud engine or you have a company that's that's taking care of it and you can ensure that, you know, your conversion rates and your success rates are are great, then I think there's there's a huge opportunity. Thanks so much for listening.
Pablo Torres:I hope this was informational. And don't forget to like and subscribe so you don't miss the next episode.
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