Merchants accepting payments via mobile phones experienced the highest card-not-present fraud volume in 2009, facing on average 3,385 attempts to commit fraudulent transactions each month, new research shows, suggesting the need for higher security as more merchants accept mobile payments.
Javelin Strategy & Research, a Pleasanton, Calif.-based research firm, conducted the survey in June for Atlanta-based LexisNexis Risk Solutions, a division of LexisNexis. For its research, the company surveyed approximately 1,000 merchants online and interviewed by phone more than 5,000 U.S. adults that included 828 fraud victims.
Overall, fraud losses as a percentage of total revenue were higher for mobile merchants at 1.13% when compared with 0.83% for online-only merchants and 0.86% for merchants with both online and brick-and-mortar stores, according to the report, which did not note the total monetary losses for each merchant type.
Online-only merchants faced on average 2,033 attempts to commit fraudulent transactions each month, while merchants with both online and physical stores faced 2,142 attempts, according to the report. So far this year, large e-commerce merchants have faced an average of 3,161 attempts per month, with 34% going undetected.
Of the fraudulent transactions mobile merchants face, 38% go through undetected because even with “various fraud-mitigation tools in place, fraudsters can still steal a consumer’s card account,” Alan Ruperto, Javelin associate analyst, tells PaymentsSource.
Because making purchases using mobile phones is still a new payment method, “how fraud will play out is still unknown,” Jim Rice, LexisNexis Risk Solutions director of market planning, retail and e-commerce, tells PaymentsSource.
Moreover, as more companies develop and launch mobile wallets, which store consumers’ payment information electronically, the door will open for “greater fraudulent exposure that may not exist across other methods,” Rice says.
Despite the high fraud risk, many merchants still are interested in accepting mobile payments, with one in four merchants planning to do so within the next 12 months, Rice explains.
Across the entire retail industry, merchants lost about $139 billion in all fraud areas in 2009, Javelin’s research shows Additionally, for every $100 in fraudulent transactions, merchants incurred a cost of $310 in total losses when including costs associated with replacing lost or stolen merchandise, according to the report.
The majority of consumer card fraud occurs on existing credit and debit card accounts, the research found. In 2009, credit card fraud affected 6.5 million victims and debit card fraud 3.5 million, representing 65% and 28% of all existing card fraud respectively, according to the report.
Both the credit and debit card markets, however, experienced improved overall fraud losses from the previous year. In 2009, the average amount a fraud victim paid out of pocket for credit card fraud declined to $314 from $521 the previous year, while the amount for debit card fraud decreased to $243 from $545. The out-of-pocket costs include anything related to the resolution of fraud, such as lost wages and attorney fees.
LexisNexis attributes the decline in costs to better account monitoring and shorter periods of both misuse and detection.
To combat fraud, the merchants surveyed indicated they increasingly are outsourcing transaction and customer-profile databases to third-party risk management providers. They also more often are using point-of-sales authentication devices, IP-address detection, rules-based filters to block high-risk transactions, tracking tools, and online-purchase authentication such as Verified by Visa Inc. or MasterCard Worldwide’s SecureCode and asking consumers to include their card’s card verification value or card validation codes.
Moreover, 54% of the merchants surveyed said education is a key factor in reducing fraud losses, which includes educating consumers, LexisNexis notes in the report. Merchants should “show consumers how to protect themselves against fraud so they always feel comfortable making a purchase,” either in-store, online or via a mobile phone, Rice says.
Indeed, consumers want to feel secure and be “in control of that security,” Ruperto says.
“Based on Javelin’s recent research, several financial institutions and issuers now offer consumers tools to monitor their accounts through e-mail or text-message alerts,” he adds. Plus, with mobile banking, consumers may check their accounts at any time to detect any fraudulent transactions, Ruperto adds.
With increased consumer and merchant education and an improved economy, fraud losses in 2010 should decrease, LexisNexis surmises in the report.
But “merchants should remain proactive” regarding fraud prevention and detection, especially if they plan to accept mobile payments, Rice contends.
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