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Retailers are contending with a markedly higher level of fraud this year than they did in 2015, with the fraud rate increasing from 1.32% of revenue to 1.47%, finds the 2016 LexisNexis True Cost of Fraud study. Last year marked the first time the rate was greater than 1%.
When analyzed by merchant type, mobile commerce and international merchants share the highest fraud rate—1.69%—up from 1.39% for m-commerce and 1.56% for international retailers in 2015. Large e-commerce retailers had the next highest rate, 1.43%, up from 1.39% in 2015. The fraud rate for merchants that only accept face-to-face payments is 1.27%, up from 0.99% in 2015.
The volume and value of fraud also increased. In 2015, retailers on average experienced 156 successful fraudulent transactions. That increased to 206 in 2016. The average value of these transactions increased from $113 to $146.
Credit cards are most commonly linked to fraudulent transactions, accounting for 41% of bad transactions at large e-retailers and 63% at physical-acceptance-only merchants. Debit cards, in comparison, account for 32% and 28%, respectively. Alternative payment methods, such as PayPal, eBillme, and Google Checkout, account for 22% and 38% respectively.
Retailers did improve their performance in preventing fraudulent transactions. In 2016, they halted 236 such transactions on average compared with 177 in 2015. The average value of prevented fraudulent transactions increased from $133 in 2015 to $157 in 2016.
The trends, however, are not adding up in retailers’ favor. “It’s a real wakeup call,” Aaron Press, co-author of the study and director of e-commerce and payment at LexisNexis Risk Solutions, says via email. “Last year was the first time the metric crossed the 1% mark, and we were surprised to see it jump again,” Press says. “At that level, it means fraud costs may be compounded by increased payment-acceptance costs.”
As for why the fraud rate continues to increase, Press suggests it comes down to the continuing availability of compromised payment credentials and the relatively low risk to criminals. Breaches, in many instances made possible by malware, continue to be a challenge.
The ongoing migration of the U.S. payment industry to the EMV chip card standard also appears to be a factor, especially among card-not-present merchants, Press says. “While correlation is not the same as causation, it does appear that EMV is, as expected, contributing to a rise in [card-not-present] fraud,” he says.
For example, large online retailers cited chargebacks as 49% of their fraud-related costs, up from 38% in 2015.
Retailers must take a deliberate approach to their fraud management, Press says. By doing so, “retailers can continue to approve transactions and maintain a good customer experience while keeping fraud looses at acceptable levels,” he says. “The payment companies need to take the same approach, working in collaboration with their merchants to actively manage fraud, provide data, and make tools to help available.”
The LexisNexis True Cost of Fraud study will be released at the Card Not Present Expo in May.
