Retailers Losing 1.32% of Revenue to Fraud

According to the LexisNexis® True Cost of Fraud study, merchants are overwhelmed by increasing revenue losses to fraud.

The annual study shows a drastic upswing in retail fraud as merchants lost 1.32 percent of revenue to fraud in 2015 compared to 0.68 percent in 2014. While all merchant segments took a substantial hit on fraud losses as a percentage of revenue, international and mCommerce merchants were hardest hit with 1.56 percent and 1.68 percent lost, respectively.

A concern that appears to be a significant driver of fraud mitigation costs for merchants is that despite the use of automated systems to flag potentially fraudulent transactions, almost half (46 percent) of flagged transactions are still sent for manual review, leaving merchants to render a decision in almost three-quarters of these flagged transactions, the study said. Merchants allocate as much as one-fourth of costs dedicated to fraud prevention to manual reviews, according to the study.

“Manual reviews are time-consuming and expensive, driving more costs into the business and causing customer friction, which can impact overall top-line revenue,” said Dennis Becker, vice president, Corporate Markets, LexisNexis® Risk Solutions. “To address both issues, analyzing the solutions and decisions that contribute to the need for manual reviews is critical.”

The LexisNexis Fraud Multiplier, which calculates the total cost per dollar of fraud, hit an all-time low in 2015. The study shows this metric, which includes both direct and indirect costs, declined almost 28 percent, from $3.08 in 2014 to $2.23 in 2015. However, the drop in the overall fraud multiplier is not the good news that it may appear to be at first glance, said the study. With the surge in fraud through remote channels, merchants were increasingly liable for a greater portion of chargebacks. This has the effect of driving down the multiplier cost as it increases the direct losses relative to the other fraud-related expenses.

The study also reveals a surge in debit card fraud as fraudsters make a last-ditch effort to use stolen data before the arrival of EMV. Debit card-accepting merchants attributed 30 percent of fraud to this payment type in 2015 compared to 16 percent in 2014.

Qualitative interviews of financial institutions found that many are also contending with the same issues related to fraud being experienced by merchants. Consistent with merchant trends, financial institutions agree that debit card fraud is a growing challenge facing their industry. Financial industry executives are split on their assessment of chargebacks – one executive maintaining that they saw fewer chargebacks from merchants in 2015, another executive asserted success in transferring liability to merchants.

The complete LexisNexis® True Cost of FraudSM study is available at: lexisnexis.com/risk.

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