Merchants Spending $3.13 for Every Dollar of Fraud in 2019: Survey

A dollar of retail fraud now costs merchants about $3.13 to deal with on average, and increases in mobile commerce and international transactions are largely to blame, according to new data from LexisNexis Risk Solutions.

The company’s 10th annual “True Cost of Fraud” study surveyed 700 U.S. risk and fraud executives in retail and e-commerce businesses found that $1 of fraud now costs merchants more than three times as much in chargebacks, fees, merchandise redistribution, investigation labor, legal prosecution and IT software and security. That’s an increase of 6.5% from $2.94 last year.

“The number of businesses allowing mobile commerce has expanded beyond traditional mid-to-large in-store retailers to include small retailers selling digital goods (such as electronic gift cards, software and mobile apps) and mid-to-large retailers and e-commerce merchants selling physical goods. This, combined with increased international transactions and more automated botnet activity, serves to create a climate where fraud thrives,” the company said.

Merchant size and the sale of digital goods appeared to influence merchants’ fraud experiences, but the survey also found that fraud volumes were significantly higher among merchants that accepted payments through either a mobile browser, app, or “bill to mobile phone” feature. For example, mid-size and large retailers with digital goods for sale experienced 3,085 fraud attempts per month, and their average cost per dollar of fraud was $3.40 if they allowed mobile commerce; similar retailers that did not allow mobile commerce only experienced 2,411 attempts per month, and their average cost per dollar of fraud was $3.38.

“Not surprisingly, fraud costs have risen and are highest for mid/large retailers and e-commerce merchants that sell digital goods, but the mobile channel sends costs higher,” the company noted.

Balancing identity verification with fraud detection without irritating customers has become harder, it noted.

According to the data, 43% of respondents said verifying customer identity was a top challenge, up 11% from 2018. For many, the rise of synthetic identities was a big factor, as was the use of the mobile channel for transactions and the volume of malicious automated botnet orders placed at once. Average monthly fraud volume rose 133% for mid-to-large sized retailers selling digital goods through the mobile channel, according to LexisNexis.

Across the board for debit and credit cards, respondents reported increases of at least 41% in card-not-present fraud and ID theft between 2018 and 2019. For mid-size to large e-commerce merchants with digital goods, the increase reached 62%. Retailers across the board also reported double-digit increases in fraud losses from stolen cards.

“There currently exists a perfect storm of increased cross-border, digital and mobile fraud and executives are under pressure to deliver prevention solutions that stem escalating fraud losses,” LexisNexis Risk Solutions VP of Fraud and Identity Management Strategy Kimberly Sutherland said. “To effectively fight fraud, it’s crucial that all merchants understand that there is no one-size-fits-all solution. There’s no doubt that those using a layered solution approach involving identity authentication, transaction verification, digital identity tools and behavioral biometrics are better prepared to fight fraud.”