LexisNexis® : CNP Merchants are Suffering Significant Losses Due to Increased Fraud
The annual LexisNexis® Risk Solutions True Cost of Fraud℠ Study, released in September of 2015, demonstrated increasing losses due to fraud suffered by merchants that accept payment card transactions from a variety of channels (m-commerce, e-commerce, MO/TO, and card-present). Unfortunately, all merchant segments lost more revenue to fraud this year than ever before. While the ballooning statistics may seem unexpected to some, the devastating news comes as no surprise to card-not-present merchants who have been struggling against this reality for the last year.
Let’s look at a summary of some of the important findings included in this report. The key question that it addresses for merchants is, “How do I grow my business and manage the true cost of fraud while strengthening customer trust and loyalty?”
For the purpose of this article, fraud is defined as the following:
- Fraudulent and/or unauthorized transactions
- Fraudulent requests for a refund/return; bounced checks
- Lost or stolen merchandise, as well as redistribution costs associated with redelivering purchased items (including carrier fraud)
This research covers consumer-facing retail fraud methods and does not include information on insider fraud or employee theft.
- Small merchants earn less than $1 million in average annual sales.
- Medium-size merchants earn $1 million to less than $50 million in average in annual sales.
- Large merchants earn $50 million or more in annual sales.
- International merchants operate from the U.S. and do business globally.
- Domestic merchants do not sell merchandise outside the U.S.
- Large e-commerce merchants accept payments through multiple channels but maintain a strong online presence, earning 10% to 100% of their revenue from the online channel and earning $50 million or more in annual sales.
Merchants experienced increased fraud losses again in 2015, and combatted challenges in a variety of areas that contributed to higher overall fraud mitigation costs and efforts. They lost an average of 1.32% of revenue to fraud and fraud related costs, a whopping 94% increase compared to 2014. The overall morale of merchants understandably took a hit as they not only dealt with increased fraud losses but also invested considerably more in fraud prevention to no avail — and sometimes to their detriment.
Despite the use of automated systems in an attempt to more accurately and efficiently decision transactions, nearly three-fourths of all transactions flagged for fraud ended up requiring costly human intervention. Facing these and other challenges of online fraud (which is expected to continue to grow over the next few years), merchants have a daunting task in outpacing fraudsters.
Due to a surge in fraud through remote channels, merchants were liable for a greater proportion of chargebacks increasing their overall fraud losses and driving their costs per dollar lost to fraud lower.
Compared to online-only merchants, diversified merchants were spared the brunt of fraud through remote channels. An increase in fraud through remote channels caused an uptick in chargebacks, but this was dampened through the acceptance of varied payment channels by large e-commerce, m-commerce and international merchants.
2015 was an especially demoralizing year for merchants as fraud consumed even more revenue. All merchant segments were losing more revenue to fraud in 2015 and in the face of these losses more merchants believe that the additional costs of mitigation were prohibitive in 2015.
Compared to other merchant segments, large e-commerce merchants are most demoralized. This attitude makes sense given that merchants in this segment spend $115k annually on fraud mitigation while losing 1.39% revenue to fraud and its related costs, on average. Merchants prevented more fraudulent transactions overall, but online and Mail Order/Telephone Order (MOTO) transactions proved considerably more challenging. While merchants prevented more fraudulent transactions overall in the past year, merchants found it up to 7x more difficult to prevent transactions through remote channels compared to in-person.
Fraud mitigation is an excessively manual process. Even among the 25% of merchants using an automated system to flag fraud, three quarters of transactions flagged as fraudulent are ultimately decisioned by human beings.
Despite all of the effort dedicated to preventing fraud, a quarter of declines are false positives. The level of human effort involved in mitigating fraud is all the more troubling since roughly a quarter of declined transactions end up as false positives.
International merchants face the most acute false positive problem. This problem is sorely felt by international merchants, who decline the highest percentage of flagged transactions (27%), and were 4x as likely to list excessive manual orders as their top fraud mitigation challenge compared to 2014.
In-store pickups facilitate considerable shrink. In-store merchandise pickups, designed to increase convenience and efficiency, constitute a quarter of lost and stolen merchandise (shrink) among all major merchant segments.
Apply a holistic approach to managing fraud in the online and mobile channels. E-commerce merchants benefit most from a holistic approach that includes multiple solutions such as CVV and transaction analysis, as the most effective at preventing fraudulent transactions, followed by device identification, geolocation, rules -based filters, and 3D Secure.
To control costs, track the effectiveness of automated systems and manual reviews in identifying fraud very closely. With nearly three-quarters of transactions flagged as fraud involving some human intervention, analyzing the solutions and decisions that contribute to the need for human intervention is crucial to avoiding the high costs associated with manual reviews of subsequent transactions.
Prioritize device identification and automated transaction scoring during digital goods purchases, adding geolocation for physical goods ordered online or on mobile device for in-store pickup. With the absence of a physical address to provide an additional point of verification, merchants are challenged by fraud involving digital goods sales and in-store pickups. Both automated transaction scoring and device identification are among the more effective tools used in online and mobile channels, with neither specifically reliant on a physical address to be accurate in identifying fraud risk. Merchants can leverage geolocation to identify higher-risk purchases where device locations may not closely correspond to the locations where products are to be picked up.
Despite re-terminalization costs associated with EMV migration, continue to invest in e-commerce fraud mitigation solutions. Multichannel merchants face considerable costs associated with re-terminalizing for EMV card acceptance, yet fraud in the online channel continues to rise. Reducing investment in e-commerce fraud mitigation could put these merchants at immediate risk of higher fraud losses today, while leaving them woefully underprepared for the expected growth in online fraud.
Merchants should partner with financial institutions to reduce both fraud and false-positive declines. Sharing intelligence on fraud trends at a macro level allows both groups to institute more effective controls and, in turn, reduce chargeback-related costs for both. Communicating about specific high-risk transactions could prevent merchants from unknowingly approving fraud or declining legitimate transactions, which will be critical as the volume of fraudulent e-commerce transactions is set to increase alongside legitimate transactions over the next few years.