While merchants, banks, and payments providers may be tempted to blame sharply rising fraud rates on the pandemic, fraud losses were rising before Covid-19 set in and will continue to rise for as far as the eye can see, according to experts behind a major fraud report released this week.
“Retailers and e-commerce merchants should be prepared for increased fraud attacks and costs for the foreseeable future,” said Kimberly Sutherland, vice president for fraud and identity-management strategy at LexisNexis Risk Solutions, in a statement. The Atlanta-based company on Tuesday released its 11th annual LexisNexis Risk Solutions True Cost of Fraud Study: e-Commerce/Retail Edition.
LexisNexis Risk Solutions, which looks at both the direct cost of fraud and associated costs such as fees, interest, and merchandise replacement, found that that fraud cost merchants $3.36 for each dollar of direct fraud loss over the two months from late February to late April. That’s up 7.3% from the same period last year and fully 40% from 2016.
“High fraud costs impact e-commerce merchants and retailers as sophisticated threats increase,” Sutherland said, drawing on survey results from 801 risk executives at merchants operating largely through online and mobile channels.
“Sophisticated threats” include a plague of bots, or automated online messages that merchants are having a harder time distinguishing from genuine customers. The problem is magnified when merchants must make fast decisions while dealing with what the report calls “complex payment chains,” referring to the involvement of non-bank, third-party payment services. “Inability to distinguish between humans and bots” was cited as a top-three challenge in selling digital goods by large merchants, according to the study.
Another trend is increasing online activity in general. Large and medium-size merchants whose merchandise mix includes digital goods reported 39% of their transactions were done through online channels, up from 30% a year ago and from 35% just before the Covid-19 shutdowns. For large and mid-size merchants selling only physical goods, the online channel now accounts for 24% of transactions, versus 19% a year ago.
Verifying identity, particularly as botnets proliferate and online and mobile channels take on greater importance, is likely to remain a challenge for some time to come, according to the report. “It is unclear how the Covid-19 pandemic will shape the purchasing landscape over the next few years, although we do know that fraudsters will continue to shift tactics quickly in response,” said Sutherland. “The most effective way for businesses to fight fraud and protect their consumers is by performing a more complete assessment, combining physical and digital identity data of those making purchases.”