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Cost of Fraud Rises, as Does Virtual Currency Acceptance

Criminals continued to wreak havoc on retailers in ecommerce and mobile channels, causing a 10 percent rise in revenue lost to fraudsters year over year. The 2014 LexisNexis True Cost of Fraud study found merchants lost 0.68 percent of revenue to fraud in 2014, compared to 0.51 percent in 2013.

The study found each $100 of fraud costs merchants $308, while in 2013, that cost on $100 of fraud was $279. It’s even more dramatic when looking at mobile ecommerce. A $100 fraud on mobile channels cost merchants $334.

Mobile channel fraud presents a sobering contrast both with Internet Retailer’s prediction of $84 billion in mobile sales for their top 500 global retailers, and with Shopify’s recent revelation that mobile traffic to their storefronts exceeded computer traffic for the first time.

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Virtual Currencies
Virtual currency acceptance is growing quickly among international merchants, according to the study: 11% compared to only 1% of domestic-only merchants.

“This type of payment promises to play a nuanced role in fraud prevention. On the one hand, 27% of international merchants accepting virtual currency report that fraud using this payment method has increased over the past 12 months (only 12% have seen a decrease). On the other hand, fraud using certain types of virtual currency may be less damaging to merchants.”

It explained, “As certain virtual currencies, such as Bitcoin, present a reduced incentive for merchants to verify customer identity – transactions using Bitcoin cannot be reversed, so the merchant is not liable for chargebacks in these fraud cases.”

International Differences
International merchants face a plethora of challenges compared to domestic-only merchants. One challenge consistently reported by international merchants is customer identity verification, according to the study.

“While it has significantly dropped this year (29% of international merchants consider it to be the top challenge in preventing fraud when selling internationally, compared to 39% last year, it remains among the top challenges for international merchants.”

Fraud and Small and Medium Sized Businesses
Aaron Press, LexisNexis Risk Solutions’ retail industry fraud expert (@lexisnexisrisk), provided some additional context on the study’s findings regarding small and medium sized businesses, in an interview with EcommerceBytes.

EcommerceBytes.com: How did small to medium sized online merchants fare with regards to fraud? Were they more likely or less likely targeted by fraudsters in 2014 compared to the overall online merchant segment?

Aaron Press: Ecommerce SMBs fared relatively well compared to their larger counterparts but continue to deal with growing fraud attempts and losses. They also have a higher fraud multiplier, meaning each fraud incident costs them more in total.

EcommerceBytes.com: What are some good characteristics of small / medium online merchants who resist fraud to a better degree than the rest of their segment?

Aaron Press: The most successful merchants use a layered approach to deal with fraud, bringing a variety of tools to help them both stop bad transactions and also to say yes to those that might look suspect but are actually legitimate.

EcommerceBytes.com: Which particular fraud prevention steps did small / medium online merchants take, or fail to take, in 2014 that would have improved security year over year?

Aaron Press: We do not have specific information about which tools SMBs are using; but they have lower awareness of the tools and methods available, tend to use fewer tools and rely more heavily on standard tools (CVV, AVS, etc.) available through the payment networks.

EcommerceBytes.com: As EMV (chip and pin) becomes more available in the U.S., how will small / medium online sellers and their customers be able to take advantage of this technology?

Aaron Press: EMV is primarily a technology designed to prevent fraud at point of sale (POS). It does not natively protect against ecommerce fraud. As a result, it is likely that as EMV takes hold in the US, fraud will migrate to ecommerce. Online merchants will need to prepare for this and do more to authenticate customers. Robust consumer authentication, using tools such as 3D Secure (Verified By Visa, MasterCard Secure Code) have been employed successfully in other EMV regions but have not been widely deployed in the US.

EcommerceBytes.com: Which payment processors or online merchants appear to be ready to take the first lead in handling ecommerce with EMV? How will this impact small / medium online sellers.

Aaron Press: Online merchants will need to work more closely with their processors and payment partners, including fraud solution vendors, to ensure that those groups are ready and protected as EMV rolls out.

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David A Utter

David A. Utter is a freelance writer based in Lexington, KY. He has covered technology topics from search to security to online business and has been quoted in places like ZDNet and BusinessWeek. He considers his appearance on NPR’s “All Things Considered” with long-time host Robert Siegel a delightful highlight. You can find him on Twitter @davidautter and on LinkedIn.


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