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Study: Fraud costs increased 7.3% year-over-year for U.S. retailers

Retailers experienced increased online and e-commerce fraud volumes and monetary losses correlating to a mass shift to online and mobile transactions during the COVID-19 pandemic.

That’s according to the 11th annual “Lexis/Nexis Solutions for 2020 True Cost of Fraud Study: E-commerce/Retail Edition,” which found that increased fraud volumes translated into a 7.3% increase in the cost of fraud year-over-year for U.S. e-commerce and retail merchants. 

The LexisNexis Fraud Multiplier – the total amount of costs related to fees, interest, merchandise replacement and redistribution per dollar of fraud for which the merchant is held liable – showed that fraud now costs companies $3.36 for every dollar lost to fraud, compared to $3.13 in 2019 and $2.40 in 2016.  This is an increase of $0.96 over five years. U.S. costs are significantly higher than the cost that Canadian retailers face per $1 lost to fraud at $2.87.

The True Cost of Fraud Study is a comprehensive survey that compares fraud rates, impacts and challenges related to fraud detection and prevention year-over-year and during COVID-19.

Key findings from the study are below.
• Successful Fraud Attacks Increase: The average volume of monthly fraud attacks increased 9% for U.S. retailers year-over-year while the average number of successful monthly fraud attempts increased 43% to  48% for mid to large retailers and 27% for smaller retailers.

Attack volumes were already trending upward prior to the pandemic shutdown as mobile and online channels traditionally have higher fraud rates. Some of this growth is due to increased transaction volume due to the temporary closing of brick-and-mortar retailers during the pandemic.
• Pandemic Shutdown Spurs Increase in Fraud Costs: A comparative analysis of those surveyed showed that average monthly fraud attack volumes were significantly higher for specific retail segments who responded to the survey during the shutdown. Mid-to-large general merchandise retailers selling physical and digital goods had on average 70% more fraud attempts per month than those surveyed prior to the shutdown in March 2020. 

Businesses that continued operations during the pandemic who had higher mobile purchase transactions with in-store pick up experienced more fraud volume and coinciding higher fraud costs since these retailers had to rely on store employees for identity authentication rather than solutions designed to detect mobile fraud.
• Retailers Struggle to Keep Pace with Fraudsters: Retailers are finding it difficult to distinguish legitimate customers from malicious bots while balancing fraud prevention with risk-appropriate customer friction. This becomes even more complicated when purchases involve third-party, non-bank payment providers where transaction speed and volume are high and transparency into complex payment chains and end-customer profiles is low. 

Mid-to-large retailers selling digital goods are more challenged detecting and preventing fraud within these payment types. Fifty-eight percent of retailers selling digital goods say differentiating synthetic identities is a top verification challenge. Businesses new to mobile commerce contend with these issues more than businesses with more established fraud and risk mitigation solutions.

"Retailers and e-commerce merchants should be prepared for increased fraud attacks and costs for the foreseeable future," said Kimberly Sutherland, VP, fraud and identity management strategy, LexisNexis Risk Solutions. "It is unclear how the COVID-19 pandemic will shape the purchasing landscape over the next few years, although we do know that fraudsters will continue to shift tactics quickly in response. The most effective way for businesses to fight fraud and protect their consumers is by performing a more complete assessment, combining physical and digital identity data of those making purchases.

"A multi-layered strategy can protect retailers and e-commerce merchants throughout each buyer experience,” Sutherland continued. “Every transaction channel and type carry unique risks. Using different solutions to support fraud detection at various points in the consumer journey will strengthen overall defense."

The Lexis/Nexis study surveyed 801 risk and fraud decision-makers from late February through late April 2020. Respondents represented a wide spectrum of retail merchants: retailers offering e-commerce, retailers receiving a majority of their income through online or mobile channels, and retailers offering mobile commerce.

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