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EcommerceBytes-NewsFlash, Number 2896 - September 20, 2012 - ISSN 1539-5065    3 of 5

Online Retailers Face Mounting Losses From Fraud

By Kenneth Corbin
EcommerceBytes.com
September 20, 2012




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Merchants who sell on a variety of platforms are particularly popular targets for fraudsters, and sellers in the fast-growing mobile space bear an especially high burden of fraud, according to a new study.

The cost of fraudulent activity for retailers continues to rise, with multichannel sellers bearing an especially heavy burden, according to a new study from Javelin Strategy & Research and LexisNexis.

In the survey, which canvassed more than 1,000 merchants, Javelin researchers aimed to derive an actual cost of fraud, factoring in issues such as replacing merchandise, charge backs and fees paid to payment processors and other financial institutions.

Using LexisNexis' Fraud Multiplier matrix, they concluded that for every dollar in fraudulent activity that a retailer incurs, the real expense totals $2.70. So a fraudulent transaction involving a $100 item would saddle the merchant with $270 in total costs.

That figure is up from last year's mark of $2.30, a rise that analysts say is ultimately passed onto consumers in the form of higher prices.

"We're all paying for this. We all pay more for goods because of the fraud problem," Javelin President James Van Dyke said on a conference call discussing the new report.

Merchants who sell on a variety of platforms are particularly popular targets for fraudsters, the researchers found. Their report (available in PDF format here) concluded that the burden of fraud runs in ratio to the availability of multiple avenues for completing a transaction, with scammers looking to exploit browsers, texting, apps and near-field communications technologies.

Sellers in the fast-growing mobile space bore an especially high burden of fraud. For every dollar of fraudulent activity involving mobile commerce, merchants experienced a total cost of $2.83, an increase of more than 40 percent over last year.

To be sure, mobile commerce remains a small slice of the overall retail pie, but the survey revealed a sharp uptick in the number of merchants who are embracing the channel. Six percent of survey respondents said that they now accept mobile payments, up from 4 percent last year and 1 percent in 2010.

The report also highlighted the collateral damage that can result from fraudulent activity as customers sour on a brand after falling victim to a scam. Just 39 percent of merchants polled said that they believe that fewer instances of fraud will improve customer loyalty rates, while a full third of consumers victimized by fraud said they avoid specific merchants as a result.

"Merchants can make an impact. This is all about taking the right steps," Van Dyke said. "We have a dramatic disconnect between what merchants think consumers do in response to fraud ... and how consumers really do respond in (a) case of fraud."

Large ecommerce merchants, defined as those with $50 million or more in annual sales, experienced an elevated average ticket price of $219 on fraudulent transactions, compared to $120 among all merchants. The researchers suggested that that disparity could owe to the high volume of big-ticket transactions that large sellers routinely process, while smaller sellers' analytics systems would more typically flag such transactions as anomalies meriting closer scrutiny.

"Large merchants can benefit from increased awareness of specific solutions and best practices," the authors of the report wrote. "Despite being better educated than all other merchants about fraud-mitigation solutions, large retailers still know relatively little about device recognition and browser protection technologies."

The study also found that international sellers reported more than five times the rate of attempted fraud than merchants with operations confined to the United States. International sellers manage to defeat many of the attempts at fraud, but still report being victimized at more than four times the rate of their domestic counterparts.

About the Author
Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects for more than four years, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here .

About the author:

Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.

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