As retailers embrace new payment mechanisms geared to online, mobile and international commerce, they must be aware of key pain points and current fraud trends. According to the 2016 LexisNexis True Cost Of Fraud Study, the average volume and value of fraudulent transactions has risen sharply since last year. Overall, the percentage of revenues lost to fraud increased from 1.32% to 1.47%.
The comprehensive study of more than 1,000 risk and fraud executives in retail organizations, conducted by KS&R, looks at merchants’ attitudes toward fraud prevention, the challenges they face and the various ways of managing fraud, from automated to manual methods.
Key findings include:
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Chargebacks remain high among remote channels and small domestic merchants, with a 49% increase among e-Commerce merchants;
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Credit cards remain the most common method of fraudulent payment — ranging from 41% to 63% across all merchant categories — presenting a particular challenge to m-Commerce merchants; and
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The percentage of revenue lost to fraud continues to increase, with m-Commerce and international merchants taking the biggest hit at 1.69%.
The Fraud Multiplier Is On The Rise
The study uses the LexisNexis Fraud Multiplier to calculate the ‘actual cost’ of fraud incurred by retailers, calculating the total cost of fraud shouldered by merchants. Merchants not only incur the dollar amounts of chargebacks for which their company is held liable, but they also may owe fees and interest to financial institutions, and also pay to replace and redistribute lost or stolen merchandise.
This year’s findings reveal merchants are paying more per dollar of fraud than in 2015, which had seen an all-time low. Merchants are incurring a $240 loss for every $100 of fraud losses.
Higher Mobile Volumes, Higher Risks
“Merchants that deploy remote channels experience a disproportionate amount of fraud,” said Aaron Press, LNRS Director of eCommerce and Payments and the study’s author. “They are especially challenged with fraud in the mobile channel.”
The study revealed that, on average, remote channels experience a higher number of fraudulent transactions per month than in-person channels such as stores.
Mobile channels appear to be the most vulnerable. While large e-Commerce and m-Commerce retailers have similar average numbers of monthly fraud transactions, in aggregate, m-Commerce merchants lose significantly more dollars per month than large e-Commerce merchants: $214,000 per month for mobile compared to $136,000 for e-Commerce.
This is a troubling prospect given that the m-Commerce channel is expected to grow significantly over the next one to two years. While less than one-fifth of retailers surveyed currently allow mobile transactions, 32% report that they are considering adding mobile within the next 12 months.
One reason for the higher fraud figures for remote channels is that the number of fraudulent transactions that are missed is higher than those that are identified and prevented. In fact, the average number of successful fraudulent transactions per retailer rose over the last year, from 156 to 206. These transactions’ average value also climbed, from $113 to $146.
Card-Not-Present Transactions Encourage Deception
Another factor fueling remote channel fraud is the rise of EMV adoption at physical POS locations, which is causing cyberthieves to seek out less well-protected targets. Retailers should be wary as they look to accept payments via card-not-present (CNP) transactions. The effects of CNP and delayed EMV terminal adoption could make smaller domestic merchants an opportunity target for criminals.
In addition, because smaller merchants are lagging behind with their EMV implementations, they are increasingly liable for chargebacks. The survey shows an increase in both chargebacks and fraud as a percentage of revenue among small domestic merchants (those with less than $1 million in annual sales).
What Can Be Done?
It is imperative for retailers to manage the cost of fraud in order to cut their own losses as well as to foster customer trust and loyalty. As digital commerce continues to flourish, the scale of fraud could increase exponentially.
The study’s recommendations include:
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Remote channels should consider a multi-layered solution approach, redistributing fraud mitigation spend away from excessive manual reviews and toward multiple solutions;
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Mobile merchants need to remain vigilant and open to a wider variety of fraud prevention solutions;
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Smaller domestic merchants should not rely solely on EMV terminals for fraud protection; and
Small merchants in particular need to continue relationship building with financial institutions, particularly credit and debit card companies.
