News Feature | December 15, 2014

True Cost Of Fraud 2014 Study: Post-Recession Revenue Growth Hampered By Fraud

Source: Innovative Retail Technologies
Christine Kern

By Christine Kern, contributing writer

Fraud taking an increasingly bigger bite out of revenue as merchants grapple to control it

2013 was a costly year for merchants, who lost 0.68 percent of revenue on average to fraud – a 33 percent greater proportion than the previous year, according to a new fraud study.

The annual LexisNexis® True Cost of Fraud(SM) study examines the profound effects of fraud on U.S. merchants, consumers and financial institutions, establishes the actual cost of fraud, and provides key findings and specific recommendations for the industry. The key question addressed by the study is how merchants can grow their businesses, keeping fraud costs under control while also strengthening customer trust and loyalty.

According to the study, 2013 was one of the most difficult on record for merchants in terms of fraud prevention.  “A combination of several massive data breaches flooding the black market with stolen card numbers, expansion into unknown new territory in terms of mobile and alternative payments and virtual currency, and fraudsters’ last-ditch effort to make use of counterfeit cards before the implementation of EMV left merchants the worse for wear,” the study asserts.

Despite the increase in online spending this year that helped online merchants prosper, rising fraud losses and associated costs still are hitting large Ecommerce and mCommerce hard.  And fraud loss as a percent of revenue has nearly doubled since last year.

In 2013 merchants lost, on average, 0.68% of revenue—a 33% greater proportion than the previous year. In addition to their fraud losses, merchants also incurred more costs, with each dollar of fraud costing them $3.08, compared to $2.79 last year, according to the study.

Among the key takeaways of the report are:

  • Merchants are paying more per dollar of fraud in 2014, driven by increased costs associated with mobile-channel fraud.
  • Merchants are losing a significantly higher percentage of revenue to fraud this year.
  • Perpetrators of fraud are keeping pressure online in the growing online channel.
  • EMV implementation will not totally eliminate card fraud.
  • The high number of data breaches has taken a toll on the integrity of consumer identities.
  • Large e-Commerce merchants and international merchants are most affected by fraud.
  • International merchants are taking the first steps towards virtual currency, with ambiguous implications for fraud.

Among the study’s recommendations for combatting fraud are:

  • Retailers need to track fraud and its associated costs by channel and payment method.
  • eCommerce merchants should apply a layered approach to fraud prevention.
  • mCommerce merchants should implement fraud prevention solutions that specifically address threats to the mobile channel.
  • Merchants must stay ahead of data security requirements and not become complacent.
  • Merchants should raise thresholds for card fraud detection at the POS.
  • Merchants should not expect EMV to eliminate fraud, but should also employ 3-D Secure to protect against data breaches and fraud.

Ultimately, Aaron Press, director of e-commerce and payments at LexisNexis Risk Solutions told NRF, one in four merchants thinks that it costs too much to control fraud.  “They view it as a cost of doing business,” says Press. “There is a feeling that fraud is something to be managed, not eliminated. Obviously, you don’t want to stamp out everything. If you have fraud coming out of a particular country, you don’t want to stop every transaction from that country where many more of the transactions are legitimate.”