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Merchant fraud-to-sales losses up on 2014

Merchants are experiencing an increase in fraud, losing 1.32% of revenue to fraud on average compared to 0.68% in 2014, according to the annual LexisNexis True Cost of Fraud Study. International and m-commerce merchants were hardest hit with losses of 1.56 and 1.68% respectively.

Merchants saw an average of 333 fraudulent transactions per month, up from 298 last year. Whilst just over half (53%) such attempts were prevented in 2015, the number of successful fraudulent transactions is growing at a faster rate than those that are prevented.

2015 LexisNexis True Cost of Fraud Study

True Cost of Fraud Study

Merchants are struggling to manage fraud through remote channels, such as online, mail order and telephone order. The anonymity of these channels, plus the ability to conduct more fraudulent transactions in a shorter time, means that remote fraud is up to 7 times more difficult to prevent than in-person (card present) fraud. However somewhat surprisingly, fraudulent in-store pick-ups, also known as ‘click and collect’ where the customer orders online and collects in-store, account for a quarter of lost/stolen merchandise.

The study also highlights the high costs of manual review. Close to 46% of flagged transactions were sent for manual review, despite the use of automated systems. This is time-consuming but also expensive. Merchants allocate around a quarter of fraud prevention costs on average to manual reviews. There is also the problem of false positives, in that 24% of declined transactions are genuine sales.

Against this backdrop, merchants are suffering fraud fatigue. They are putting increased emphasis on fraud mitigation and deploying more fraud solutions, an average of 2.4 solutions in 2015 against 1.7 in 2014. Yet fraud levels are still rising, and there is a growing perception among the merchants surveyed that fraud prevention is costing too much.

Perhaps it is a case of spending smarter on fraud management, rather than spending more. There are no silver-bullet solutions to fraud mitigation and management. It is best to deploy a matrix of measures, monitor the effectiveness of each measure, and fine-tune the mix by industry sector, channel, customer profile, average transaction value etc. It is the effectiveness of the fraud prevention approach that is key, rather than how many tools are deployed or how much they cost.

Bigger data may also be an answer, where a wider view across more data from different sources may help to flag fraud trends and provide insight on individual transactions. The future of fraud prevention may well lie in bigger data, better algorithms and more machine learning and collaboration.

The LexisNexis study considered consumer-facing retail fraud only, not insider fraud or employee theft. The merchant panel comprised 959 risk and fraud decision-makers across various company sizes and industry segments in the US.

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