Thursday, April 28, 2011
A new payment trends and fraud study for LexisNexis by Javelin Strategy & Research found there were more than $100 billion in fraud losses in the payments industry in 2010. The study also concluded technology is developing so rapidly the payments industry is unable to keep up with new fraud techniques.
Fraud, the study reported, drives one in three customers away from merchants and creates wariness among consumers toward online retail markets. However, the author of the new study said fraud can be mitigated with the right tools and solutions.
Javelin President James Van Dyke told a LexisNexis webinar audience April 28, 2011, the problem is not just that fraud cannot be stopped. The bigger problem is that multipliers associated with payment fraud can triple the cost of the theft for merchants.
Van Dyke offered his audience the second-year results of independent payment fraud research his firm has been doing for LexisNexis. Titled Online Payment Trends and the LexisNexis True Cost of Fraud Study, the report states the percentage of online shoppers was up 14 percent and online retail sales rose 18 percent in 2010. The study additionally concluded there is also a consumer trend away from credit cards.
Van Dyke said by 2015 the 15-to-25-year-old age demographic, the so-called generation Y, will be the leading consumer spenders. This generation is moving away from credit cards to debit cards and other forms of alternative payment.
"Gen Y has very different buying preferences than the preceding generations," Van Dyke said. "They prefer real-time payments such as debit cards. I expect debit growth to remain steady. Gen Y likes anything that is not credit, revolving balance especially. Alternative payment is driving the growth in payment volume."
Van Dyke warned his audience not to confuse growth rate with volume, as credit cards, with a volume of $111 billion last year, easily outdistance the debit card volume of $84 billion. Other payment alternatives like PayPal Inc. are continuing to grow, he added.
"There's a lot of swirling around and change [in the payments market now]," he said. "This drives fraud risk up, not down."
Van Dyke said the payments industry's fraud problem is really an Internet personal identification problem. His study found consumers are often as afraid of merchant's selling their private information as they are of thieves stealing their identities online.
"It's a problem of authentication," he said. "Consumers like to know merchants are confirming their identity. If merchants can confirm identity, online business will grow."
Payment volumes are slowly increasing in every payment type, and a diversified fraud mitigation strategy is essential for both exclusively online merchants and multiplatform merchants, Van Dyke reported. The most important thing a business can do to fight fraud is to be certain the mitigation strategy is "payment type agnostic" meaning the merchant needs a strategy that addresses all forms of payment be it credit, cash, debit, check or other alternatives. "Economic conditions can, and will, dictate fraud incidence," he added.
The study found that exclusively online merchants experienced 66 percent of their fraud through credit cards in 2010, 22 percent through alternative payment methods and 14 percent through debit card use. Check fraud accounted for only 3 percent of payment theft nationwide. Statistics from all retail merchants show 45 percent of their fraud was credit card fraud, 9 percent was alternative payment fraud, 26 percent was check fraud and 22 percent was debit fraud.
Van Dyke said the statistics show"frictionless payments result in frictionless fraud." The good news is fewer merchants are reporting fraud. But Van Dyke doesn't expect that trend to last. For instance, he said he expects an uptick in fraud with the new technology that allows mobile devices to interact with merchant POS terminals.
Van Dyke said the study revealed that every $100 of payment fraud costs the merchant $310 to recover the cost of fraud solutions, merchandise replacement, recovery of loss and other items. "The multiplier effect is three times the loss figure," Van Dyke said. "Merchants are penalized for payment fraud with higher rates and chargeback fees, and then they have to battle with the acquirers over the chargebacks."
For every fraudulent transaction that goes through, there are twice as many that are turned away, he noted.
The study also rated consumer feelings toward specific payment security solutions. At the bottom of the list of favored consumer options was fingerprinting devices. "There are more concerns on device fingerprinting than with any other verification method," Van Dyke stated. He added it is important for merchants "to understand who ends up holding the bag if fraud occurs. You have to be careful to know who owns the liability and how your methods integrate with your fraud investigation tools."
LexisNexis used the last moments of the webinar to introduce and demonstrate its new Retail Fraud ROI Calculator. Jim Rice, LexisNexis Director of Market Planning for Retail and Communications Markets, said the ROI calculator will assess existing and benchmark-related fraud costs against other fraud costs in the merchant's specific market and measure revenue gains after fraud solutions are applied.
Rice said the LexisNexis solution is payment agnostic, and he offered this advice, "You have to make sure you have the right tools and solutions in place. If you don't know if you have the right solutions, work with a solutions provider who can advise you.
"For instance, we can look at mobile payments and see how consumers and small to medium retailers use the technology. Then we will make changes in the security paradigm to incorporate new security mitigation methods."
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