Understanding the True Cost of Fraud

lexis nexis

Annual Study Finds CNP Fraud Still On the Rise, Merchants Need Multi-Layered Fraud Prevention

Risk assessment firm LexisNexis® Risk Solutions released their eighth-annual True Cost of Fraud℠ study in September 2017.

The report, downloadable here from the company’s website, is one of the best indicators of where the payments and eCommerce industries stand in regard to fraud and chargebacks.

Upward Growth in Key Indicators of Fraud

The company's Fraud Multiplier is one of the central features of each annual report. This year’s LexisNexis Fraud Multiplier℠ suggests that the cost of CNP fraud is on the rise.

For each dollar lost to fraud, online merchants can ultimately expect to lose $2.66 in revenue due to the associated fees, lost merchandise, sales potential, and more. The figure is even more worse for digital goods retailers, who will lose $3.48 per dollar. While the LexisNexis Fraud Multiplier hit a five-year low in the 2015 True Cost of Fraud study, other indicators suggest less up-and-down motion and more consistent upward momentum for payments fraud.

For example, the average share of revenue any business lost to fraud in over the last year rose to 1.9%. That translates to a shocking 279% increase compared to 2014, the year before the EMV liability shift took effect.

Juniper Research reports that by 2020, $4 in every $1,000 of online payments will be fraudulent—a total of $25.6 billion in losses.

Chargebacks a Significant Contributor to Fraud Burden

43% of average monthly eCommerce transactions are identified as attempted fraud. Fraudulent transactions often result in chargebacks—and the more fraudulent transactions processed, the more chargebacks issued. Back in 2016, online merchants reported 49% of their fraud-related revenue loss is a direct result of chargebacks.

Increases in fraudulent transactions processed yield an increase in losses.

Merchants Need Multi-Layered Fraud Management

LexisNexis Risk Solutions asked eCommerce merchants how many fraud prevention solutions they used. Not surprisingly, those who utilized more tools lost significantly less to fraud.

Most eCommerce merchants tend to bundle four key services: CVV, check verification, browser malware check, and AVS. However, as we saw in last year's report, no single mitigation solution had more than 50% adoption among large eCommerce merchants in the US:

Solution % of Merchants Using Solution in 2016
Card Verification Value 43%
Transaction Verification Services 42%
Geolocation 42%
Browser / Malware Tracking 42%
Check Verification 39%
Pin / Signature Authentication 39%
Address Verification Services 36%
Real-Time Transaction Tracking 36%
Rules-Based Filters 31%
Authenticate by Quiz 31%
3D Secure Tools 27%
Automated Transaction Scoring 26%
Device ID Fingerprinting 25%
Transaction / Customer Profile Database 23%

What this suggests is, despite the vast majority of merchants wanting greater fraud protection, they are not making effective use of currently available fraud prevention tools.

LexisNexis researchers asked large merchants (those with more than $50 million in annual sales) about the benefits and costs of fraud management in the 2016 report. Most acknowledged that managing fraud and knowing customers better both increase sales and loyalty. However, the majority still felt it costs too much to control fraud, despite the obvious benefits.

In a post-Equifax fraud environment, merchants need a multifaceted, dynamic solution. That’s why Chargebacks911® suggests that the best solution for eCommerce fraud is a comprehensive approach targeting not just one form of fraud, but all fraud.

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Research Findings and Considerations

While many believe the True Cost of Fraud study to be one of the best indicators of current industry trends and threats, there are certain aspects that must be taken into consideration.

First, LexisNexis Risk Solutions outlines that, for the purpose of this study, fraud is defined as the following:

  • Unauthorized transactions (commonly associated with criminal tactics like account takeover fraud)
  • Fraudulent requests for a refund (known as return fraud)
  • Lost or stolen merchandise

Because the definition of chargebacks suggests that they result only from criminal fraud or merchant fraud, their impact is often underrepresented. Friendly fraud, which is the primary cause of chargebacks, wasn’t factored into the calculations. This means losses are substantially more severe than reported.

Additionally, statistics are self-reported. Merchants are polled on various issues and their answers are compiled into the report.

Unfortunately, merchants are often unaware of true fraud threats and their implications. For example, research conducted by Chargebacks911 using patented technologies and expert human forensics reveals the following distribution of chargeback sources:


However, when eCommerce merchants self-reported, they identified the distribution of fraud in the following way:


This inability for merchants to personally identify weaknesses and vulnerabilities is the main reason why Chargebacks911 created two of their most successful products:

  • Merchant Compliance Review is a 106-point inspection of merchant policies and procedures. Our experts help merchants identify internal operational issues that are unnecessarily increasing their risks of fraud and chargebacks. By eliminating these seemingly minor errors and optimizing the efficiency of current fraud management efforts, merchants will see a significant ROI.
  • Intelligent Source Detection™ is the only product on the market today capable of identifying the true source of chargebacks. As the report points out, combining manual reviews with automated fraud filters can reduce false positives, improve customer retention rates, and increase revenue retention—but these efforts don’t necessarily provide an understanding of the underlying reasons why fraud occurs. Intelligent Source Detection does. Our unique product can pinpoint the source of each chargeback and enable the creation of more efficient prevention strategies.

Despite possible limitations in the application of the True Cost of Fraud study results, Chargebacks911 does whole-heartedly agree with one of the company’s main recommendations:

Fraud originates from many different sources; no one solution is likely to be the “holy grail” at this point in time… There needs to be more awareness and understanding of the value of investing in a multi-layered approach to fraud mitigation… As findings have shown, the right multi-layered approach can justify upfront costs of the solution investment, as greater accuracy yields more positive results on the bottom line.”

Multiple Solutions for Comprehensive Coverage

Simply buying more products isn’t necessarily the answer, and creating a multi-layer fraud management strategy doesn’t just mean investing in multiple solutions.

Effective management means finding and implementing solutions that address all fraud threats from all channels. It is about building multiple layers of protection, layers that utilize dynamic data sets and are tailored to a merchant’s specific weaknesses. Effective multi-layer protection means reducing the risk of fraud and chargebacks without compromising loyal and valuable customers.

Chargebacks911 is an integral element in a multi-layer approach to fraud management. We don’t replace a merchant’s current fraud detection tools; rather, Chargebacks911 helps those tools work more efficiently and effectively.

If you’d like to learn more about what Chargebacks911 can do to help merchants prevent fraud, ensure sustainability, and recover more revenue, contact us today to speak with one of our chargeback experts.

Click here to view the full 2017 LexisNexis Risk Solutions True Cost of Fraud Study.

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