The cost of retail fraud is rising

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The cost of retail fraud is rising

By Gina Acosta - 12/08/2017

Retail fraud is on the rise as more shoppers turn to online shopping, and retailers are grappling to combat the problem.

According to LexisNexis's 2017 True Cost of Fraud report, online channels and sales of digital goods are increasing fraud at retailers. This year, every dollar of fraud cost merchants $2.77, up from $2.40 a year ago.

A central feature of the report, the LexisNexis Fraud Multiplier, estimates the total amount of loss a merchant incurs, based on the actual dollar value of a fraudulent transaction. This year, every dollar of fraud cost merchants $2.77, up from $2.40 a year ago, according to the Fraud Multiplier tool.

Also, the report finds that the volume of fraud has risen sharply in the last year—from a monthly average of 206 to 238 successful fraudulent transactions, and from 236 to 257 prevented fraudulent transactions—while the level of fraud as a percentage of revenues has also inched upward from 1.47 percent to 1.58 percent.

What's driving fraud increases are merchants with online channels and sales of digital goods, particularly where they have international transactions. The cost per dollar of fraud, among merchants with international transactions is significantly higher than those merchants with domestic-only transactions. This coincides with the rise in account hacking and takeovers.

Beyond this, new access channels and payment methods, including mobile wallets, the U.S. EMV rollout, and digital channel applications have all made the regulatory and payment landscape more challenging for merchants.

Notes LexisNexis Risk Solutions vice president of fraud and identity management strategy, Paul Bjerke: "With online fraud outpacing reported growth in e-commerce sales volume, we can point to EMV implementation at physical retail stores as a cause. Also in the digital space, botnet fraud also has risen dramatically, which correlates with the rise in e-gift card volume and fraud."

Other findings of the report include:

  • For merchants with digital and physical goods, the LexisNexis Fraud Multiplier℠ has increased 63 percent since last year, rising from $2.18 to $3.56.
  • With e- and m-commerce merchants, a slight drop occurred in reported debit-card fraud, likely the result of chip/pin use. However, credit card fraud remains high, with debit card fraud remaining high among merchants selling both physical and digital goods.
  • When discussing the top three challenges that retailers are facing, identity verification remains the highest for the online channel. However, top mobile channel issues vary, suggesting more complexity in this channel.

The study also looks at merchant attitudes toward fraud prevention and the challenges they face. Observes Kimberly Sutherland, senior director, fraud and identity management strategy, LexisNexis Risk Solutions: "Merchants selling physical and digital goods often apply a one-size-fits-all program to fight fraud, and they use a limited set of solutions. These less advanced and less sophisticated legacy solutions do not appear to be working, given the sharp rise in costs and volume of successful fraud attempts."

This is the eighth annual comprehensive research study on U.S. merchant fraud conducted by LexisNexis Risk Solutions. The methodology of this study targeted U.S. financial services companies with a comprehensive survey of 185 risk and fraud executives conducted during March and April 2017. Respondents represented all channels, company sizes, industry segments, and payment methods. The overall margin of sampling error is +/- 3.1% at the 95 percent confidence level. Data reflects the U.S. Merchant population based on weighting to U.S. Economic Census.

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