The LexisNexis 2018 True Cost of Fraud study surveyed 703 risk and fraud executives at targeted U.S. merchants. The respondents represented all channels, company sizes, industries, and payment methods to fully understand the cost fraud. This report found the overall cost of fraud and the number of fraud attempts is continuing to increase. For digital good merchants, those costs and fraud attempts are even higher than the average.
The Overall Growing Cost of Fraud
In the True Cost of Fraud study, they found for every dollar of fraud cost merchants on average $2.94. This cost is a 6% increase compared to last year when fraud cost merchants $2.77. They calculated the cost of fraud for this study by taking into account:
- Fraudulent and/or unauthorized transactions (true fraud)
- Fraudulent requests for refund/return (chargeback fraud, friendly fraud)
- Lost or stolen merchandise, as well as redistribution costs associated with redelivering purchased items
Not only is the cost of fraud continuing to grow year-over-year, but the amount of fraudulent attempts on merchants is growing as well. The monthly average of reported fraud transaction attempts in 2012 was 170. In 2017 was 495. Now in 2018, it has lept to 619. This growing pain point requires attention from merchants to not only gain funds back but to prevent fraud from happening in the first place.
Digital Fraud Cost
In the first quarter of 2018, fraud attempts on mobile apps increased by 30%. Shopping, gaming, financial and travel apps are attractive targets. The worst financial losses accrue to the apps with high payouts and verticals of scale.
Digital v. Physical
In the True Cost of Fraud research they found that mobile commerce merchants selling digital goods faced the highest fraud cost. Mid- to large-size digital commerce merchants have an average fraud cost of $3.29 for every dollar fraud. Compared to a mid- to large-size mobile merchant only selling physical goods, fraud cost them $2.30 – $2.54 for every dollar.
For mid- to large-size digital merchants the average fraud attempt per month increased to 1,319. Compared to mid- to large-size merchants only selling physical goods averaged 769 per month.
Identity or Account Takeover Fraud
LexisNexis also found that identity related losses have grown significantly among all merchants, but is especially seen in those selling digital goods. Almost half of the identity fraud from mobile commerce merchants selling digital goods is through to the use of synthetic identities.
Why Are Digital Goods Attractive to Fraudsters?
Digital goods are anything that can be bought online and instantly delivered. Which can include gaming, in app purchases, video on demand, event tickets, music download purchase, e-gift cards, etc. Because of the combination of online transaction, the goods are easy to sell, and the lack of physical product fraudsters love digital goods.
Online / Recurring Transactions
Online transactions are naturally at higher risk for fraud. When someone makes a purchase online they only have to type in the card number. Unlike in person transaction that need to be processed through an EMV reader and require the physical card to do so.
Digital goods, especially subscription digital goods, are at risk for friendly fraud or chargeback fraud. Many digital merchants have subscription plans for their products. Purchases such as an Xbox Live subscription or a Spotify membership are recurring payments which the customer could forget to cancel then dispute the charge to get their money back. Or a friendly fraudster could simply forget that they signed up for a subscription and think the charge is fraudulent.
Easy to Sell
There are a lot of legitimate peer-to-peer sites that support the sale of digital goods. Meaning fraudsters have a large customer base that will buy their stole merchandise. So this makes digital products attractive because it is easy to turn around and sell. Not to mention that digital products are delivered instantly. So the fraudster could steal the goods and resell them in a matter of minutes.
No Physical Goods
A fraudster could get their hands on millions of dollars worth of digital goods which can all be store on a laptop or smartphone. Unlike physical goods where they would need a warehouse to store all the product. The fraudster could also be anywhere in the world to access the goods or sell them to any geographical location.
Prevent and Fighting Fraud
Taking action against fraud is more important than ever before as the cost of fraud continues to rise. In the digital world there are even more threats of fraud than companies selling physical products. So it is necessary to have a strong combination of fraud and filters and dispute management.