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Mobile payments are barely out of the starting gate, but fraudsters are quickly discovering the new channel’s potential for making a dishonest buck, according to new research from LexisNexis Risk Solutions. Fraud losses from mobile payments as a percentage of total revenue were 1.13% compared with 0.83% for online-only merchants and 0.86% for multi-channel merchants, according to the study conducted for LexisNexis by Javelin Strategy & Research.
“It’s clear that [as] retailers are moving into that direction, retailers are experiencing significantly more fraud as a percentage of sales,” says Jim Rice, director of market planning for retail and e-commerce markets at LexisNexis Risk Solutions.
Javelin surveyed 1,006 risk-control executives at merchants of all sizes and channels—brick-and-mortar, online, etc.—along with 5,000 consumers, including 828 fraud victims, for its second-annual fraud study for LexisNexis Risk Solutions, the risk-control unit of LexisNexis, the business- database giant. The study for the first time includes a multiplier that Javelin and LexisNexis call the “true cost” of fraud. They pegged the overall multiplier at 3.1, meaning that for every $100 in actual fraud, the further costs, primarily payment card network chargeback fees and the cost of replacing lost goods, brought the total loss to $310. The multiplier differs by merchant size and category.
Merchants accepting mobile payments attributed 11% of their fraudulent transactions to the mobile channel, and 14% said fraud was increasing through the mobile channel. Losses stand a good chance of growing, too. While relatively few merchants actually take mobile payments today, 28% of e-commerce merchants plan to begin accepting payments through mobile devices in the next 12 months, according to the study. “This is really a good estimate of the potential for ‘bust-out’ fraud,” says James Van Dyke, president of Pleasanton, Calif.-based Javelin. “You have a risk of something, purchases through mobile devices, getting much larger as mobile commerce grows.”
Attempted mobile fraud has a slightly higher success rate than fraud attempts through most other channels. Merchants accepting mobile payments reported being hit with an average of 3,385 attempted fraudulent transactions per month, with 1,287 getting through undetected for a success rate of 38%. Multi-channel merchants reported 2,142 fraud attempts per month and 769 going through for a success rate of 36%. For online-only merchants, the respective figures were 1,049, 531 and 37%. Strictly brick-and-mortar merchants reported the fewest incidents of attempted fraud, 1,049 per month on average, but, with 531 transactions getting though, they suffered the highest fraud success rate, 51%.
It’s not completely clear what makes the mobile channel risky. “I think there’s a factor of the unknown,” says Rice. But he notes that a smart phone or cell phone equipped with a mobile browser, by its very nature, moves around, which means merchants have less assurance that the transaction originator is the phone’s rightful owner. Mobile wallets also present some risks, he adds.
Merchants that take a pass on offering mobile payments for fear of fraud, however, risk losing out on the channel’s upside as more consumers begin using smart phones and become comfortable with the idea of paying for things with them. “It’s an important channel for retailers because it opens up a new way to interact with their customers,” says Van Dyke.
Overall, the study estimates that fraud is a $100 billion problem for merchants, but there was some good news—losses this year are down about 25% from 2009. Javelin and LexisNexis attribute that improvement to a greater awareness of fraud threats and the improved performance of anti-fraud systems, in addition to a gradual improvement in economic conditions.
