Surging Fraud Expenses Eat Into Retailers’ Bottom Lines

Is retail fraud a runaway train that can’t be stopped or slowed down? According to the 2018 LexisNexis True Cost of Fraud™ Study, the cost for each dollar of fraud losses has risen 6 percent from last year, all the way to $2.94. In fact, this cost has grown 31 percent since 2015. It just keeps going up.

The increased fraud rates also show that fraudsters are perfecting their craft, resulting in greater fraud losses. As the cost of fraud continues to grow, businesses need to implement a multilayered approach to fraud prevention in order to protect both their customers and bottom lines.

Fraudsters Flock to Digital

While digital channels have opened up a new frontier of selling opportunities, they have also been easy targets for criminal behavior compared with face-to-face transactions. Fraudsters are thriving in the digital space due to less barriers of resistance put forth by companies to combat fraud. An uptick in volume of botnet orders and the rise of synthetic identities has played a significant role in rising fraud levels across digital channels.

M-commerce merchants see 49 percent of all fraudulent transactions via credit cards. Across digital channels, fraudsters are taking advantage of alternative payment methods, where it's easier to use a stolen or synthetic identity as opposed to in-store payment methods. E-commerce companies and retailers with digital channels must stay vigilant and create better “know your customer” methodologies and protocols to help prevent fraudulent transactions.

Smallest But Not Least

It’s not only larger retailers that are at risk from the rising cost of fraud. We found that small businesses also face significant obstacles in tackling the rising costs of fraudulent transactions. Smaller-sized businesses are often faced with a lack of resources, which, in turn, leaves fraud departments understaffed or nonexistent. Many small businesses cannot adequately track fraud, making it impossible to pin down the source. On the other end of the spectrum, larger businesses are faced with more complex challenges, resulting from early entry into new channels. Becoming early adapters to new mobile channels exposes large-scale retailers to new, unforeseen fraud, making the fraud difficult to track down and extremely costly. Companies that track the channel source of fraud not only experience fewer fraudulent transactions, but see the costs incurred decrease as well.

Mitigating the Cost of Fraud

No retailer, regardless of channel or size, is immune to the effects of fraud. However, many companies operating in the digital space are simply not adequately using identity verification tools to mitigate risk in their digital channels. Many larger merchants tend to shift their focus toward areas where they're successfully preventing fraud, leaving vulnerable areas lacking attention and resources. Additionally, the same merchants are only taking half measures to implement advanced identity verification solutions when attempting to combat identity fraud. The underutilization of these tools can be attributed to a range of factors, including costly implementation and a lack of human capital to staff fraud departments.

However, without multilayered fraud prevention tools in place, the cost of fraud can be very damaging to a company’s bottom line. Companies must adapt and keep their fraud prevention practices current as they aim to curb the cost that fraud has on them. Today’s proper investment in identity verification systems can prevent tomorrow’s financial loss. The sooner businesses undertake these fraud prevention measures, the quicker they can see their profits grow.

Kimberly Sutherland is the senior director of fraud and identity management at LexisNexis® Risk Solutions, a company that uses big data, proprietary linking and targeted solutions to provide insights that help make organizations more secure and efficient.