The Good, the Bad and the Statistically Significant
Plenty of people still pay cash for goods and write checks to pay their bills, perhaps as many who pay online or via mobile devices.
Merchants are well aware that thieves and fraudsters exhibit the same range of diversity as legitimate shoppers, and retail LP researchers have expanded their efforts to measure the ways in which retailers can be victimized.
Though retailers lose more to theft, potential losses from fraud and consumers’ fears of identity theft have put additional burdens on retail LP professionals. Shrinkage amounted to more than $119 billion worldwide last year, rising 6.6 percent globally and 6 percent in North America, according to the Global Retail Theft Barometer (see sidebar).
Though fraud is not measured by the same metrics as theft, a study on the True Cost of Fraud conducted by Javelin Strategy & Research for LexisNexis Risk Solutions found that fraud cost merchants in excess of $100 billion last year. In addition, for every $100 in fraudulent transactions, retailers incurred a “true cost” of $230.
Last year saw something of a downward trend in total merchant fraud losses, the LexisNexis study found, as well as a decline in the true fraud cost multiplier, from just over $3 in 2010 to $2.33 last year. The fraud multiplier calculates dollars lost by merchants in paying interest and fees to financial institutions and the expense of replacing or redistributing goods for every dollar lost in fraudulent transactions.
“Overall, fraud rates could be poised for an upswing,” the study cautions. “Although the number of fraudulent transactions went down … the nature of transactions is tending to be more severe.” The average dollar value of a completed fraudulent transaction was higher in 2011 than it was in 2010, the report noted.
Two areas of criminal activity
Fraudulent payment typically involves two areas of criminal activity, says Jim Rice, director of marketing planning, retail and e-commerce markets at LexisNexis Risk Solutions. First comes the identity theft involving confidential personal data of payment cardholders. Then there are the fraudulent retail transactions by individuals using the bogus card information.
Rice suggests looking at the report as a template for benchmarking a company’s fraud protection against the whole spectrum of transactions and payment options.
“Merchants need to have a fraud strategy in place that addresses multiple forms of payment rather than focusing on individual payment methods,” he says, adding that the fraud strategy should be an “identity-based” security or protection system.
The LexisNexis study found that small merchants are active in their use of alternative payments; for instance, 31 percent of smaller merchants reported using PayPal. The proportion of fraudulent transactions attributed to this payment method is far higher among small merchants, the study found, adding that “small merchants are less equipped to battle the more sophisticated methods of fraud associated with newer payment methods and fraudsters are taking advantage of it.”
LexisNexis has developed “scorecards” that can be used by retailers, Rice says. “They can really drill down and ask themselves, ‘what is my current protection?’” Once merchants go through the scorecard, they will know how their security and fraud protection systems stack up, he says.
Using the scorecards enables merchants to measure their own historical transaction data and measure by retail segment or merchandise classifications, Rice says. Once this has been done, protocols can be established.
Between the pressure for more consumer protection, the turmoil over “swipe fees” and other payment card issues, the industry is likely to see more regulation. “There’s a lot of shifting taking place,” says James van Dyke, president and founder of Javelin. “What it adds up to ... is that retailers better have fraud and security solutions in place.”
Among positive findings: more fraudulent transactions were prevented than successfully completed in 2011, and the average dollar value of prevented fraudulent transactions ($148) was higher than the average value of completed fraudulent transactions ($22), the report notes.
Consumers also experienced a decline in fraud, according to Javelin’s annual identity fraud survey, with about 8.1 million Americans being victims of ID fraud at a cost of $37 billion, down significantly from $56 billion in 2010.
As for newer payment methods, such as mobile devices, Javelin’s research found that consumers are still reluctant to make use of them due to security concerns. The True Cost of Fraud found that mobile payments are accepted by 4 percent of merchants, quadruple the percentage in 2010.
“Nonetheless, merchants are preparing to expand — with 20 percent of current nonusers indicating they intend to accept mobile payments in the next 12 months,” the survey found. “Given this interest among merchants as well as the explosion in smartphone adoption among consumers, the growth of mobile payments is imminent.”
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