5 Strategies to Help Your Business Combat Fraud
Merchants are losing $100 billion in fraud losses due to unauthorized transactions and fees/interest associated with chargebacks, according to the 2009 LexisNexis True Cost of Fraud Study, which surveyed more than 1,000 merchants, financial institution executives and 4,800 consumers. Factor in the additional cost of lost/stolen merchandise, and U.S. retail merchants are suffering a total industrywide fraud loss of $191 billion.
Retailers are absorbing the vast majority of the costs associated with fraud, the study found. Among the numerous fraud types affecting merchants, identity fraud or fraudulent transactions comprised the bulk of fraud from a cost standpoint, representing 52 percent of total fraud losses.
Certain merchant segments revealed a higher prevalence of fraudulent transactions, such as large e-commerce retailers, of which 40 percent saw upsurges. Digital goods merchants attributed 54 percent of their fraud loss to unauthorized purchases, while merchants in telecommunications, social networking industries and online gaming reported 64 percent to 67 percent of their total annual fraud loss as the result of identity fraud.
Credit cards are linked to nearly half of all fraudulent transactions for all merchants, and 50 percent of large retailers saw upticks in credit card fraud last year. And as more merchants adopt alternative payment methods, fraudsters are responding: 29 percent of large retailers reported increases in alternative payments fraud during 2008.
So-called “friendly fraud,” when a consumer makes an internet purchase via credit card and issues a chargeback after receiving the merchandise, accounts for more than one-third of the total fraud for online merchants.
To help combat the rising costs of fraud, the report offered five strategies that businesses should implement:
- Take a multichannel view of transactions’ tools and technologies. Integrate fraud mitigation efforts across channels to improve the cost effectiveness of staff and technology, looking toward prevention solutions with multichannel fraud tracking.
- Create standard processes on investigating customer claims for unreceived purchases, and regularly collaborate with carriers to track lost merchandise incidence patterns. Friendly fraud is an area of increasing concern for many online merchants; proactively respond to this threat by tactically compiling and monitoring delivery tracking data.
- Forge cross-industry partnerships with financial institutions to reduce the disparity of the overall financial institution/merchant fraud loss distribution. Collaborate on real-time fraud patterns and mitigation trends, as each can provide the other with unique perspectives on how, where and when fraudulent transactions occur.
- Focus fraud mitigation efforts on preventing and detecting fraudulent transactions — i.e., where merchants are getting hit the hardest. Assess the effectiveness of current fraud detection tools, and examine solutions with proven success and adaptability to evolving fraud techniques. LexisNexis’ report revealed lower satisfaction ratings across solution categories, but merchants showed a higher preference for transaction validation and real-time transaction tracking tools.
- Improve fraud prevention and detection efforts by benchmarking methods, loss patterns and investments. Learn from your peers in order to identify best practices, levels/patterns of losses and specific goals for reducing the cost of fraud. Many organizations lack a structured model for assessing the return on investment on fraud mitigation solutions and, therefore, may be overspending on some areas while underinvesting in others.