As Fraud Attempts Increase, So Do the Costs of Mitigating Them

More types of retailers and e-commerce merchants are facing more fraud attempts as the number of attacks increased for every merchant type covered in the 2019 True Cost of Fraud report issued Tuesday by LexisNexis Risk Solutions. And with the growth comes an increase in the cost to counter the fraud.

Each dollar of fraud loss costs a merchant $3.13, a 6.5% increase from $2.94 in 2018, Alpharetta, Ga.-based LexisNexis Risk Solutions says. This figure has increased each year since 2016, when it was $2.40. Such expenses can include chargebacks, fees, labor cost for investigations, and enhancing software security.

Fraud costs for mid-to-large e-commerce merchants selling digital goods was the highest among merchant types at $3.50. The lowest was for small retailers selling only physical goods at $2.35.

Just as remarkable is that of the 700 U.S. risk and fraud executives surveyed, each merchant type they represent experienced increases in total monthly fraud attempts. Small retailers selling digital goods had the largest increase, up 128% to 1,604 from 702 in 2018. Mid-to-large retailers selling digital goods had the next highest increase, up 104% to 2,913 attacks from 1,426.

Mid-to-large retailers selling only physical goods saw their monthly fraud attempts grow to 1,780, up 55% from 1,145. Fraud attempts at mid-to-large e-commerce merchants selling only physical goods likewise increased 47%, to 901 from 606. Only mid-to-large e-commerce merchants selling digital goods saw a small decrease, to 1,383 attempts, down from 1,390 in 2018.

Fueling much of the growth in fraud attempts is the rise in synthetic identities, automated bot attacks, and identity verification challenges, LexisNexis Risk Solutions says. 

“Automated botnet attacks are being noticed more often by mid/large retailers with digital and mobile transactions,” the report says. “Other segments are newer to the mobile channel and are significantly more likely to mention synthetic identities and minimizing customer friction as issues with identity verification.”

Bot activity, for example, increased for 33% of the merchants that were able to provide an estimate of the bot attacks they experienced. They estimated that bot activity accounted for 7.1% of their transactions per month.

Among its recommendations, LexisNexis Risk Solutions advises not employing the same risk-mitigation tools for physical goods with digital-goods transactions because the nature of the products changes the risk.

And to counter bots and synthetic identities, the company suggests not relying solely on traditional identifiable data. “Digital-identity and behavioral-biometrics data and analysis is essential for detecting anomalies based on device use, linkages, remote channel behaviors, locations, and patterns,” the report says.