Risk Management

Fraud Costing Retailers Bigger Chunk of Sales

A survey finds all merchant segments took a big hit on fraud losses in 2015 and many are spending more than $100,000 a year on mitigation.
Katie Kuehner-HebertSeptember 18, 2015

Retail fraud losses are on the rise and merchants are spending a lot to try to prevent them, according to a LexisNexis survey.

The True Cost of Fraud survey of more than 950 merchants found that retailers lost 1.32% of revenue to fraud in 2015, compared with 0.68% in 2014.

While all merchant segments took a substantial hit on fraud losses as a percentage of revenue, international and mobile commerce merchants were hardest hit, with 1.56% and 1.68% lost, respectively.

Trying to stop fraud is also a major expense for merchants.

While all merchants spent on average $7,000 annually on fraud mitigation efforts, larger merchants that are more likely to serve clients through multiple channels spent upward of $100,000, according to the survey.

“This high amount of spend on fraud mitigation, as well as the high dollar volume of fraud losses and the number of attacks these merchants experience, leaves no doubt as to why merchants would express increasing exasperation at the lengths required to reduce fraud impact,” LexisNexis said.

A “significant driver” of fraud mitigation costs for merchants appears to be that, despite the use of automated systems to flag potentially fraudulent transactions, almost half (46%) of flagged transactions are still sent for manual review. Merchants allocate as much as one-fourth of costs dedicated to fraud prevention to manual reviews.

“Manual reviews are time-consuming and expensive, driving more costs into the business and causing customer friction, which can impact overall topline revenue,” Dennis Becker, vice president of corporate markets for LexisNexis Risk Solutions said in a news release.

The LexisNexis Fraud Multiplier, which calculates the total cost per dollar of fraud, hit an all-time low in 2015, declining almost 28% 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,” the survey says. “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.”