It’s the Holiday Season, But Fresh Data Shows How Fraudsters Work Online Year-Round

Online merchants expect to battle fraud with added vigor during the holiday-season shopping frenzy. But now data released this week shows how fraud losses, and the costs of managing fraud, plague these merchants year-round.

On average, e-commerce merchants sustained 142 successful fraud transactions each month this year, up 12% from the monthly average in 2017, according to the report from LexisNexis Risk Solutions, an Atlanta-based vendor of risk-management technology.

But the picture has been much bleaker for large sellers, those with $10 million or more in annual revenue. For these merchants, the monthly average for successful fraud transactions this year has been a whopping 572, more than double the average last year. By contrast, smaller merchants, those with less than $10 million in annual sales, saw their monthly average drop from 108 to 67.

LexisNexis received data from merchants for which at least 80% of sales are derived from either an online channel or via a mobile app or browser.

The company attributes the higher rate of fraud for larger merchants to the fact that they generally sell more digital goods, everything from downloadable software and games up to cloud-based apps and software. These products are particularly attractive to criminals because they can be obtained immediately using fake credentials. Two-thirds of the larger merchants surveyed sell these products, compared to 29% of the small merchants.

Fraud costs include more than the actual loss of the product’s value, so LexisNexis computes how much merchants pay in costs related to chargebacks, fees, merchandise management, and investigations, The report then computes this cost as a multiple of the actual fraud loss. In 2018, this multiple is down slightly from 2017 for both larger and smaller e-commerce merchants. The difference for smaller ones is $2.32, down from $2.38, and for larger ones $3.20, down from $3.37.

But when these costs are expressed as a percentage bite of overall revenue, the picture darkens. Merchants with less than $10 million in annual sales have seen that bite rise from 1.82% to 2.05%, while the larger sellers have sustained an increase to 2.91% from 2.71%.

Again, including digital goods in the merchandise mix exacts a toll in overall fraud cost. For the larger sellers that sell only physical goods, the report finds fraud-related costs as a multiple of actual fraud loss is $2.62, but this number jumps 25% to $3.27 for merchants offering digital products in their merchandise mix. The difference in fraud loss as a fraction of revenue is also dramatic, at 3.33% for those selling digital goods versus 1.88% for those offering physical goods only.