Perspective on the Cost of Fraud in Retail

Security issues surrounding e-commerce and m-commerce (mobile) have earned quite a bit of attention from the press during the past year and rightly so. LexisNexis recently published its sixth annual study that values the actual cost of fraud borne by US retailers. Entitled “The True Cost of Fraud 2014” (, the study’s objectives are to present key findings and specific guidance to retailers for mitigating these costs.
Researchers from Javelin Strategy and Research surveyed 1,142 risk and fraud decision makers and influencers from retailers of all sizes, markets, channels, and payment methods. Respondents included executives from a very wide range of retail classifications, including automotive, housewares, computers, hardware, restaurants, drug/health, gasoline stations, textiles, sporting goods, general merchandise stores, non-store retailers, and miscellaneous.

The research covers so-called “consumer-facing” retail fraud methods listed below, but does not include information on fraudulent activity or theft by employees.

  • Fraudulent and/or unauthorized transactions
  • Fraudulent requests for a refund/return
  • Bounced checks
  • Lost or stolen merchandise, as well as redistribution costs associated with redelivering purchased items (including carrier fraud)

The Cost of Fraud
Merchants lost an average of 0.68 percent of sales to consumer-facing fraud, which is 33 percent more than the previous year’s rate of 0.51 percent. The increase in losses is the result of a higher volume of fraudulent transactions this year.

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The study subdivides the fraud losses by segment. While the average of all merchants lost 0.68 percent of sales, m-commerce merchants lost 1.36 percent, international merchants lost 1.21 percent, and large e-commerce merchants lost 0.85 percent of sales.

Merchants also incurred more ancillary costs in addition to fraud losses. Each dollar of fraud cost them $3.08, compared to $2.79 last year, according to the LexisNexis® Fraud Multiplier™. Ancillary costs include charge backs for merchandise, the fees and interest to financial institutions and payment processors, as well as any replacement, redistribution, or restocking fees incurred by a merchant. The rise in costs is associated with an increase in m-commerce fraud, as more retailers begin to accept mobile payments.

Fraud Prevention Batting Average
Since we are in the business of loss prevention, I was fascinated by the data showing the number of prevented fraudulent transactions per month as compared to the number of successful fraudulent transactions per month.

The bad news is that the number of successful fraudulent transactions has risen over the past four years, jumping from an average of 91 per month last year to 133 per month this year—an increase of over 46 percent.

The good news is that the number of prevented fraudulent transactions has also increased over the four-year time period, jumping from an average of 94 per month last year to 165 this year – an increase of over 75 percent.

So if we compare the number of prevented fraud transactions to the number of successful fraud transactions, we find that the fraud prevention batting average is rising. Last year merchants prevented 94 per month, and the crooks were successful 91 times per month – a ratio of 1.03 (anything over 1.0 is considered “good”). This year merchants prevented 165 per month, but lost 133 – a ratio of 1.24. Thus, the tide seems to be turning in favor of the good guys.

The report suggests that the best way to get a handle on fraud and its related costs is tracking incidents by channel and payment method. Every payment method and channel shows a unique risk profile and may require different steps for mitigation. Tracking helps merchants assess the need for investment in fraud prevention solutions. The available solutions may need to be tailored to the type of channel and payment method.

The analysts also recommend that m-commerce merchants and those considering accepting payments from this channel should implement fraud prevention solutions that specifically address the unique threats. Mobile is a growing fraud channel that carries the same fraud liabilities as other “card not present” transactions, except contactless NFC payments. As m-commerce expands beyond the digital-goods realm, the costs associated with this fraud type increase. Solutions such as device fingerprinting and geolocation are among the options best suited for mobile transactions.
It doesn’t take a genius to understand that we will be continually chasing the criminal element involved in retail payment transaction fraud, and all other retail frauds for that matter. What matters is our relentless pursuit of countermeasures that keep us steps ahead, instead of behind.

To read more about the challenges associated with mobile payments, see “Mobile Payments—The New Retail Revolution and Its Impact on LP.”


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