Data: The new pain points of mobile commerce

August 1, 2018 11:33 AM

Mobile e-commerce is growing fast, and online retail fraud levels are keeping pace with this expanded sales volume.

One reason is an increase in digital goods available online—digital gift cards, subscriptions, downloadable software, entertainment and tickets. Criminals have devised new “fast fraud” tricks using synthetic identities, aided by widespread data breaches in the last couple of years; and mass “botnet” attacks, catching many merchants off guard this year, according to a study LexisNexis Risk Solutions released this week.

While the average volume and value of fraudulent transactions has risen over the past year, so has the cost to resolve each case of fraud. Younger consumers—those most prone to making purchases of mobile entertainment and games—are prime targets for the newest types of fraud in mobile e-commerce. And while credit cards are still the top fraud target, alternative payments are getting hit too.

The size of fraud as part of the total cost of online merchants’ revenue has been creeping upward for the last several years, from 0.51% of total revenue in 2013 to 1.8% this year, based on LexisNexis Risk Solutions' latest survey of 703 risk and fraud executives at retail organizations.

“We began to take notice a few years ago when fraud suddenly was no longer under 1%, but now that the cost of fraud as a percent of revenues is moving closer to 2%, that’s getting into the realm of the how much retailers say they typically pay to accept payments,” said Aaron Press, director of market planning for fraud and identity at LexisNexis Risk Solutions.

The amount merchants pay to cope with each dollar of fraud has been on the rise for the last four years. Based on merchant estimates, it now costs $2.94 to resolve each $1 of online fraud, up from $2.77 last year. That includes the total cost of chargebacks, fees, merchandise redistribution, labor, investigation, legal issues and IT/software security, LexisNexis Risk Solutions said.

Fraud costs are highest for mobile-optimized e-commerce merchants that sell digital goods, according to the study. For midsize to large mobile commerce merchants with digital goods for sale, total fraud costs were $3.29 for each $1 of fraud, up 24% from 2017.

“Digital goods have rapidly gained as a fraud target for popular products like games, music, movies and subscriptions that exist solely in the digital realm," Press said. "Merchants face pressure to deliver these items immediately because of customer demand, so it’s tough to verify the prospective buyer’s identity quickly, and there’s no physical address where the product is sent, creating another security challenge.”

While the individual cost of digital goods may be lower than many physical-goods items sold online, the sheer volume of fraudulent digital goods transactions has risen quickly over the last year, according to LexisNexis Risk Solutions.