By Maanas Godugunur, Director of Market Strategy, Lexis Nexis Risk Solutions
E-commerce merchants and fraud mitigation teams face a potent moment. Over the past three years, the explosion of e-commerce and associated fraud activity have amplified opportunities for pioneering merchants to improve revenue, approve orders with confidence, reduce manual reviews and enhance customer experience. Merchants that keep their valued customers safe and happy across the customer journey, from account creation through the latest transaction, increase the likelihood of not only more immediate transactions, but also greater customer lifetime value.
Conversely, the LexisNexis Risk Solutions True Cost of Fraud Study: E-commerce and Retail – U.S. and Canada Edition shows that organizations with limited fraud and identity capabilities incur 16 percent higher costs for each dollar of fraud loss. Put another way, e-commerce organizations that under-invest in fraud and identity incur greater risk of financial harm than organizations that invest fully. The following three takeaways from the study help to contextualize the current opportunity for e-commerce and retail organizations.
Mobile channel use continues to grow
Mobile transactions among U.S. and Canadian consumers continue to climb, spurring e-commerce merchants and retailers to adopt mobile commerce. For example, e-commerce merchants in both countries reported an 18 percent increase in in-app transactions year over year.
Consumers continue to adopt alternative payment options, too. U.S. e-commerce merchants reported a 75 percent increase in transaction volume paid for with emerging methods, including buy now, pay later (BNPL), social media payments and various mobile/digital wallets. The actual transaction volume of alternative payment methods could be higher because the distinction between the alternative categories may not be fully clear to survey respondents.
Many merchants report prioritizing the mobile channel when designing the consumer shopping experience. Unfortunately, offering consumers mobile transactions affords fraudsters another channel for attack.
Mobile commerce drove the volume and cost of fraud
U.S. merchants with high mobile transaction volume (i.e., 45 percent or more of overall transaction volume) reported a 52 percent increase in average monthly fraud attacks while similar Canadian merchants reported a 101 percent increase. Fraud levels increased 13 percent and 10 percent for U.S. and Canadian merchants respectively, where mobile transactions constituted less than 10 percent of overall transaction volume.
The cost of fraud increased in tandem with the volume of fraud attacks. Merchants in the U.S. spent $3.75 on average for every dollar lost to fraud, up 19.8 percent from the 2019 study. Canadian counterparts spent U.S. $3.19 on average per dollar of fraud loss.
Friendly fraud and synthetic identity fraud erode revenue across the customer journey
Particularly at the point of new account creation, friendly fraud and synthetic identity fraud cost merchants more in fraud losses than account takeovers, lost or stolen merchandise or refund fraud. One-third of U.S. merchants ranked customer identity verification a top online fraud challenge, ahead of verifying phone or address information, determining the source of a transaction and identifying malicious bots. Malicious bot attacks constitute 35 percent of U.S. e-commerce merchants’ transactions volume—nine percentage points higher than Canadian counterparts.
Digital identity verification presents a particular challenge at new account creation because the consumer has no history and no established online behaviors with the merchant. Without these signals, merchants have greater difficulty in assessing the risk of new customers.
Fraud exacts a higher toll on merchants with limited fraud mitigation practices
Roughly half of merchants have fully integrated digital customer experience operations and cybersecurity capabilities with fraud prevention efforts. Lowering organizational barriers between these business functions affords merchants more signals with which to assess the risk of each consumer. At least half of U.S. and Canadian merchants bolster fraud capabilities with cybersecurity alerts and social media intelligence. Among merchants who have not yet fully integrated these functions, most report progressing towards this objective.
This year’s study shows that the cost of fraud and volume of successful attacks declines for merchants that invest in a multi-layered fraud and identity solution approach which is integrated with cybersecurity and digital experience operations. Merchants spend U.S. $4.24 per dollar of fraud loss when they have limited or no capability to verify digital identifiers (e.g., email, phone number risk, biometrics), device risk and location, and physical attributes (e.g., mailing address, behavioral biometrics, transaction risk). For companies that have integrated these capabilities, the LexisNexis Fraud Multiplier drops 16 percent to U.S. $3.66 per dollar of fraud loss.
Build the business case for increased investment in fraud mitigation
Forward-thinking merchants approach consumer interactions at each stage of the customer journey as unique by accounting for increasing variability in consumer, device and purchasing data and behavior. Fraud stacks authenticate digital and physical criteria while assessing identity and transaction risk. Layered solutions address dynamic risks from different channels, payment methods and products. Fraud assessments adjust to each transaction via a layering of tools that analyze digital identity signals and physical identifiers.
This multi-layered solution approach supports the imperative to improve customer experience. Legitimate customers experience optimal friction when organizations distinguish consumers from bad actors. By expediting and protecting customer interactions, effective and efficient fraud and identity capabilities increase customer loyalty and lifetime value.
For merchants at all stages of integrating fraud and identity with cybersecurity and customer operations, the Fraud Multiplier provides a strong business case to increase investment in a multi-layered solution approach. The report contrasts organizations that incur lower costs with every dollar of fraud loss against organizations that suffer proportionately more financial loss with every fraud incident. Hopefully, applying the Fraud Multiplier to estimate an organization’s true cost of fraud will help e-commerce merchants navigate this potent moment, seize the current opportunity to grow and improve the customer experience.
To estimate your organization’s fraud multiplier, download the 13th annual True Cost of Fraud Study: E-commerce and Retail – U.S. and Canada Edition.