A survey has claimed mobile payments face far higher card-not-present fraud threats than any comparable category. Charles Davis looks at how US retail fraud is affecting merchants, financial institutions and consumers; and why many merchants are still interested in accepting m-payments despite these findings.
Merchants accepting payments conducted through mobile phones faced, on average, 3,385 attempts to commit fraudulent transactions each month in 2009, a study has shown. The findings point to a major weakness in an otherwise surging segment of the payments market.
The second annual LexisNexis True Cost of Fraud Study, conducted by Javelin Strategy & Research, examines how US retail fraud affects merchants, financial institutions and consumers. While the study demonstrated that fraud is more than a $100bn problem for retail merchants, fraud losses decreased by 25% from 2009.
The reduction may be attributed to a gradual improvement in economic conditions, greater awareness of fraud threats and increased success of effective fraud prevention solutions, LexisNexis said.
“Fraud continues to be a $100bn problem for retail merchants,” said Jim Rice, director of market planning for retail and e-commerce markets at LexisNexis Risk Solutions. “While the total cost of fraud has gone down since last year, retailers still lose more than three dollars for every one dollar lost due to a fraudulent transaction, and online or mobile fraud is a growing threat.”
Fraud clearly remains a major issue for mobile merchants. Fraud losses as a percentage of total revenue were higher for mobile merchants at 1.13% compared with 0.83% for online-only merchants and 0.86% for merchants with both online and brick-and-mortar stores, according to the report.
Online-only merchants faced, on average, 2,033 attempts to commit fraudulent transactions each month, while merchants with both online and physical stores faced 2,142 attempts, according to the report. The numbers are eye opening.
So far this year, large e-commerce merchants have faced an average of 3,161 attempts per month, with 34% of them going undetected. The study finds that the majority of consumer card fraud occurs on existing credit and debit card accounts. In 2009, credit card fraud affected 6.5m victims and debit card fraud 3.5m, representing 65% and 28% of all existing card fraud respectively, according to the report.
In 2009, the average amount a fraud victim paid out of pocket for credit card fraud declined to $314 from $521 the previous year, while the amount for debit card fraud decreased to $243 from $545.
Of the fraudulent transactions mobile merchants face, 38% go undetected because they are originating from stolen accounts and are thus virtually untraceable.
Despite the meteoric fraud risk many merchants are still interested in accepting mobile payments, with one in four merchants planning to do so within the next 12 months.
Across the entire retail industry, merchants lost about $139bn in all fraud areas in 2009, the study shows. The losses reverberate: for every $100 in fraudulent transactions, merchants incurred a cost of $310 in total losses when including costs associated with replacing lost or stolen merchandise. Additionally, the study found consumer victims of retail fraud incurred $5.5bn in costs stemming from losses, legal fees and other factors.
The study is a reminder that US financial institutions and retail merchants continue to bear the majority of the fraud burden, striving to protect their reputations and brands by covering their customers.
Most fraud occurs on existing card accounts Regulation E of the Electronic Funds Transfer Act limits the liabilities of consumers with regard to unauthorised electronic funds transfers, as long as fraud is reported in a timely manner.
Consequently, mean costs of consumer ID fraud continue to decrease, dropping from $498 in 2008 to $373 in 2009. Median consumer costs remain at $0, as they have since 2003 because of zero liability card agreements. Nevertheless, the impact of retail fraud is not just monetary – it in fact alters consumers’ perceptions and behaviours, significantly affecting customers’ relationships with merchants and financial institutions.
Lessening the impact of fraud
There is a mixture of positive and fear-driven reactions from fraud victims as a result of their experience. Approximately 36% report the intent to avoid certain merchants; 17% will change financial institutions (both issuers and primary banks); 27% report they will spend less money; and 31% will switch payment methods.
“The negative perceptions signal the need for merchants not just to educate their customers on how to protect their personal information, but to proactively demonstrate how they are working to secure payment information, especially in the online environment,” the report said.
Allowing merchants’ website security to be visibly robust to consumers will help to increase adoption of online shopping and improve consumer comfort levels with using payment methods online.
Merchants therefore have an opportunity to lessen the impact of fraud on consumers in a more hands-on manner, not only by implementing back-end fraud mitigation tools and processes but by engaging in more consumer-facing educational efforts. These include educating customers on ways to safeguard their payment information in the form of tips on websites, and informing customers about tools they can use for enhanced protection when shopping online.
The merchants surveyed indicated they are increasingly outsourcing transaction and customer-profile databases to third-party risk management providers. Greater percentages of merchants are using all of the major anti-fraud tools, including point-of-sale authentication devices, IP-address detection, rules-based filters to block high-risk transactions, tracking tools, and online-purchase authentication such as Verified by Visa or MasterCard Worldwide’s SecureCode. They are also asking consumers to include their card verification value or card validation codes.