Retail Fraud Surges 30%, Merchants Now Pay Nearly $3 for Every Dollar Lost

Posted August 21, 2018

Retail Fraud Surges 30%, Merchants Now Pay Nearly $3 for Every Dollar Lost

A new report finds consumer demand for fast, frictionless transactions is leading to sharp increases in mobile and online ecommerce fraud—and their associated costs.

According to data captured in our new “2018 True Cost of Fraud: Retail Edition,” the success rate for fraudulent transactions is up nearly 30% over 2017. For larger, multi-channel merchants, it’s even higher—as much as 36%.

Making matters worse: Merchants are paying more for the trouble—as much as $2.94 in total costs for every dollar lost to fraud. That’s a 6% jump from a year ago, thanks to increased chargebacks, merchandise redistribution, fraud investigations, legal prosecutions and cybersecurity operations.

So what’s going on? For starters, the hotly competitive retail landscape means merchants must meet customer expectations for convenience while continuing to generate business growth. But these same drivers also carry increased risk for identity-related fraud—especially with the rise of synthetic identities and the volume of botnet orders.

The study, which surveyed 703 retail sector risk and fraud executives, points to key hurdles merchants face in finding ways to stem mounting losses and protect themselves against a growing number of threats in digital channels. Among the most pernicious challenges:

The Mobile Minefield

Over the past year, consumer adoption of the mobile channel has seen double digit growth—with the biggest gains seen by merchants selling digital goods.

Today, up to 70% of these merchants’ shoppers make purchases via mobile device.

The catch: Fraud costs are higher for those selling digital goods instead of physical goods. In fact, every dollar of fraud costs mobile digital goods merchants an average of $3.29, an increase of 24% over 2017. By comparison, similarly sized merchants that only sell physical goods through the mobile channel face $2.78 for every dollar lost to fraud.

Indeed, online merchants selling physical goods without mCommerce options all pay even less—typically between $2.30 to $2.54 for every dollar lost to fraud.

So what gives? Shopper demand for the instant gratification of eGift cards, apps and other downloadables mean transactions had better be fast and hassle-free—or else.

As a result, merchants seeking to minimize friction also struggle with verifying the identity of shoppers. In fact, up to 39% of mobile fraud losses for digital goods merchants are attributable to thieves making purchases using stolen or synthetic identities—often in conjunction with credentials-testing bots.

A Lack of Fraud Tracking

As Peter Drucker once wrote: “What gets measured gets managed.”

Over the last year, there has been a significant increase in the number of larger online and mobile merchants that report they’re tracking fraud by both channel and payment method. That’s good. But unfortunately, merchants are more likely to be tracking where fraud has been successful rather than where they’ve been able to prevent it.

This lessens the overall effectiveness of fraud mitigation since fraudsters are adept at testing for areas that are less of a focus for merchants, and by changing their attack points accordingly.

Limited, Unlayered Defenses

While merchants are employing fraud detection and prevention tools, the use of advanced identity authentication solutions is still under 50% for elements such as device ID, geolocation and real-time risk scoring, which can be especially helpful when dealing with mobile payments and sales of digital goods.

What’s more, many have not optimally layered solutions to protect against unique threats from different channels—online vs. mobile, for instance—as well as for transaction types.

Make no mistake. It’s absolutely crucial for retailers to not just invest in a large number of fraud prevention solutions, but in selecting the right combination and layering of solutions to defend against different threats.

To that end, merchants are beginning to seek out solutions that combine physical identity data with digital identity data in order to gain a 360-degree view of the individual on the other end of a transaction, so they can instantly recognize fraudsters and other risks.

According to the report, digital goods merchants who layer core, identity and fraud transaction solutions, for instance, experience reduced fraud costs that are up to a third less than those that use only a limited set of point-based solutions.

The $435 Billion Question

Merchants scrambling to deploy the right set of layered solutions needed to reverse the trends captured in the report and do so amid the runup to this year’s biggest shopping seasons.

They should have plenty of incentive. According to the study, fraud’s cost as a percentage of total revenues has risen to an average of 1.8%, from 1.5% in 2017. In a global industry expected to see $2.4 trillion in sales this year, that comes out to $435 billion in losses.

Here’s hoping they succeed—and that next year’s “True Cost of Fraud” report finds an industry has turned a corner in the never-ending fight against fraud.

To get a full picture of the escalating costs associated with mobile and online fraud, download a FREE copy of the “2018 True Cost of Fraud: Retail Edition”

Kimberly Sutherland

Kimberly Sutherland

Senior Director, Fraud and Identity Management

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