Report: Fraud Rates Declining but Cost of Fraud Growing

By D.J. Murphy, Editor-in-Chief,

While fraud as a share of revenue is declining, its cost to merchants—especially online and mobile merchants—continues to rise, according to a new report from antifraud technology provider LexisNexis Risk Solutions. Rather than simply total up the replacement costs of goods lost to fraudsters, for the past five years, LexisNexis and its research partner Javelin Strategy and Research have tried to assess the full range of costs involved when merchants fall victim to fraud.

In 2013, for every dollar lost to fraud, it cost merchants $2.79, up from $2.69 last year and $2.32 in 2011. For online merchants, however, every $1 in fraud cost $3.10—a frightening thought for fraud and risk managers who have seen fraud in other countries explode in card-not-present channels after they implemented EMV, which the U.S. is on course to do in the next few years. As Jim Van Dyke, CEO of Javelin, puts it: “So, the space that’s been hit the hardest is going to actually get hit harder yet in the next year or two.”


In addition to the headline “true cost of fraud” numbers LexisNexis arrived at by applying its proprietary Fraud Multiplier, the research also found differences in fraud based on type, channel, merchant size and geographic location. The study found falling fraud rates as a share of revenue for every channel except mobile, which saw the percentage of revenue lost to fraud increase from .64 percent in 2012 to .75 percent in 2013. For all merchants, fraud as a share of revenue fell slightly from .54 percent last year to .51 percent this year.

Large e-commerce merchants still lose a greater share of revenue to fraud than merchants in general, the study found, but they experienced the largest decrease—falling from .60 percent in 2012 to .53 percent last year. The authors pointed out that large e-commerce merchants believe in and use a wider array of fraud-fighting technology than any other merchant segment.

What Small E-Commerce Merchants can Learn from Large Ones

Online merchants endure higher costs for each dollar of fraud, according to the LexisNexis Fraud Multiplier used in the study, because in addition to replacing the lost or stolen good, they also bear costs associated with fighting chargebacks, redistribution of the goods involved in the fraudulent transaction and, increasingly, fees and interest owed to financial institutions sitting in the middle of the transaction.

LexisNexis But, while online merchants endure the biggest costs for fraudulent activity, the largest e-commerce merchants saw the biggest dip in fraud rates as a share of revenue of any merchant category in the study. Researchers attribute that relative success to the attitudes of the bigger online retailers, which are forged in a crucible where they are the biggest targets of criminals, according to James Cook, director of market planning for retail markets at LexisNexis.

“If you look at the number of incidences, the fraudsters are really targeting the larger e-commerce players,” Cook said. “They’re dealing with a lot more attempts and obviously are incurring more fraud activity on a percentage basis. They’re able to control it because they’re using many different solutions.”

Across the board, significantly more large e-commerce merchants employ various fraud-fighting techniques than merchants in general. From advanced techniques like device identification (used by 17 percent of large e-commerce merchants vs. 2 percent of all merchants) and IP geolocation (employed by 25 percent of large e-commerce merchants as opposed to 3 percent of all merchants) to the most common authentication method (CVV, which is used by 55 percent of large e-tailers and only 30 percent of all merchants), large e-commerce merchants lead the way in the use of antifraud measures.

Smaller online retailers that are not targeted as much shy away from the more costly antifraud solutions, but Van Dyke says it might be time for them to take a lesson from their larger competitors

“Since they’re not being hit as hard, they’re not employing as many services as they could or should,” he says. “The study draws out that the large merchants really have a more robust attitude, if you will, toward combating fraud. They see it as the protection of the consumers that come to their site. They believe it will generate more sales and loyalty long term from those customers so they are willing to invest in order to do that. That’s a recommendation we hope to draw out for the smaller and midsize merchants in this world.”

In addition, with the coming implementation of the EMV standard, it’s likely that even smaller and midsize e-commerce merchants will be dealing with more fraud in the near future.

“When we look at indicators from around the world,” Van Dyke predicts, “I wouldn’t be surprised at all to see a double-digit increase in proportion of fraud in the online realm.”

The report recommended that businesses focus on preventing fraud in the online channel, the costliest of all for merchants. Improving consumers perceptions of e-commerce security will enable online retailers—large and small—to maintain a competitive advantage in the face of rising fraud.

Payment ‘Permutations’ Lead to More Fraud for Mobile Merchants

LexisNexis Mobile—on everyone’s minds these days as businesses evaluate when and how to deploy the technology—also is a more costly channel than average when considering the impact of fraud. Every dollar of goods lost in a fraudulent transaction costs mobile merchants $2.83. And, while mobile transactions continue to increase, the cost is not actually generated from fraud being perpetrated during those particular transactions, the report found. The simple act of a merchant enabling itself to accept mobile payments leads to higher fraud, Van Dyke says.

“When a merchant equips their checkout experience to allow for mobile to be among the options, that merchant immediately sees an increase in fraud even though it may not have a significant increase in the proportion of consumers who are actually initiating mobile payments,” he explains. “That may seem kind of crazy, but the data makes it clear this is what’s going on.”

Van Dyke says adding mobile payments capability creates a “permutations” issue. Adding ways a merchant can accept payment leads to a more complex environment that is easier for fraudsters to take advantage of.

“Merchants are throwing themselves headlong into mobile because they don’t want to pass up the revenue increase—they just don’t want to say no to a customer,” he says. “And yet, they don’t yet have the new inherent authentication methods and analytics that draw on the strength of the mobile handset and the table device. Those aren’t really in play yet. So, you’re opening the door to more fraud as you have people finding back doors around verification or authentication methods.”


The 2013 LexisNexis True Cost of Fraud study is the 5 th annual version of the report. Van Dyke touts the methodology used in collecting the data as “very rigorous.” The online survey was completed by more than 1,100 merchants beginning in May of this year. Download a copy of the free report here.

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