Prepare for the Worst
T he true cost of fraud involves a lot more than merchandise lost in fraudulent transactions. Ancillary losses involve everything from restocking the merchandise and paying fees to financial institutions to the rupture of customer relationships and the erosion of customer loyalty, say the authors of the LexisNexis “2012 True Cost of Fraud” survey.
The heart of the problem is card-not-present transactions. Though such sales represent a small fraction of all sales, the role they play in fraudulent transactions “is huge,” says Jim Van Dyke, president of Javelin Strategy & Research, which conducted the survey for LexisNexis Risk Solutions.
Jim Rice, director of market planning for the retail and e-commerce market at LexisNexis, says that, “For every $100 of fraud, there is $270 of fraud loss.” And the problem is growing as retailers expand into foreign markets and mobile commerce. “When you look at global and mobile, you ... take on this complexity where you can expect there to be fraud,” Van Dyke says.
In its fourth year, the “True Cost of Fraud” survey’s extended time frame allows for broader analyses of trends — and both Rice and Van Dyke say the full customer impact of fraud only recently became evident.
A key takeaway is that merchants are incurring additional post-fraud costs from customer attrition — even as most retailers remain unaware of this finding. And although merchants believe that fraud does not impact loyalty or customer acquisition, one of every three fraud victims will change where he shops based on victimization. “Customers vote with their feet,” Van Dyke says.
One of the study’s three major recommendations addresses this point directly. “Improve overall profits by allocating more resources to retaining or even attracting customers who have been defrauded,” the report suggests. “Shoppers are often obsessed with their safety (and in particular, when shopping online), and they ... want to play a role in their own self-protection. Productive engagement requires careful implementation of solutions, education and partnerships.”
Another recommendation implores retailers to fully train and equip all staff members with “the strongest possible policies and technologies,” adding that “because large merchants are the subject of higher-value fraudulent transactions, they must ensure that they are prepared to fight fraud at every level.”
The third major suggestion is for retailers to make fraud protection a higher priority. “As merchants increasingly do business online, over mobile devices and around the world, they must take advantage of the many solutions available to aid in a battle that will become increasingly pitched and complex,” the study notes. “Expect the worst to achieve the best.”
Benchmarking was “the genesis” of this report, says Rice. LexisNexis Risk Solutions clients were looking for a “global view that provided better tools.” The data has spawned a series of scorecards, offering in-depth information retailers can use to compare themselves against their peers.
The segment-specific scorecards have been created for small merchants doing less than $1 million in annual sales; merchants with between $1 million and $50 million in annual sales; merchants with sales of more than $50 million a year; multi-channel retailers; e-commerce merchants; and mobile-accepting merchants. There is also a scorecard for international merchants — those retailers operating from the United States and doing business globally, including those who accept international orders or ship merchandise outside the United States.
The scorecard “really lays out data points for comparison against like merchants” like “fraud and impact on customer base,” Rice says. The intention is to assist merchants in determining how they rate against each other. “We encourage them to talk to other retailers” about risks and tools for combating fraud, he says.
Rice and Van Dyke stress that anti-fraud programs should be “identity-based,” with tools that enhance the ability to prevent bogus transactions. “The identity of the individual using a card is just as important as whether the card presented is ‘good,’” says Rice, adding that information like home and e-mail addresses can help identify the user and link her to the payment card.
Large, global merchants most threatened
The report also found that large e-commerce merchants incur average losses per fraudulent transaction of $219 – nearly twice the overall rate of $120. This difference may result from larger merchants being accustomed to higher ticket amounts, and thus not having alarms raised on analytic systems.
Large merchants can benefit from increased awareness of specific solutions and best practices. Despite being better educated than all other merchants about fraud mitigation, large retailers still know relatively little about device recognition and browser protection technologies; in addition, they face challenges in integrating technology security solutions with identity-based data, which could help them secure and authenticate card-not-present transactions.
Merchants that sell internationally are under siege in two measures of criminal activity: attempted (or prevented) fraud and successful fraudulent transactions. Merchants in this category report being the target of more than five times as many attempted fraudulent transactions than the average of all retailers combined. Even though these global merchants stop a large number of attempts, fraudsters still succeed at defrauding them more than four times as often as all merchants in general.
Acceptance of mobile payment is showing significant early growth, increasing by half from last year’s study. Indeed, merchants have high expectations for the emerging mobile payments channel as a way to increase revenue and acquire customers. The fraud multiplier is now dramatically higher for mobile-accepting merchants, but a “shockingly low” 2 percent of merchants cite a greater need for mobile-related security as a major component of their overall business strategy.
“In preventing payments fraud, mental preparation — as in ‘preparing for the worst’ — is correlated with profitability,” the study concludes. “Surprisingly, merchants who believe fraud is inevitable are more likely to act as though they can change the course of fraud. The ‘fraud fatalists’ uncovered in this study also tend to be the best-educated merchants about a gamut of fraud technology solutions.”