September 15, 2011, 11:11 AM

Merchants are paying out less for fraud recovery

Retailers are paying $2.33 to recover from every $1 of fraud.

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When retailers are hit by fraudulent transactions, they typically must pay a multiple of each dollar value of fraud to cover interest and fees charged by financial institutions and to replace or redistribute goods to cover inventory losses. This year, however, that multiple is lower than it was last year, according to a new report conducted by Javelin Strategy & Research for LexisNexis, a provider of legal and business information services.

For every $1 in transaction fraud realized by merchants this year, they’re paying out $2.33 to cover related recovery expenses, including interest and fees charged by banks to cover chargebacks, down from close to $3 last year, the report says. The report is based on a survey of more than 1,000 merchants in May 2011.

The decline in costs related to fraud, however, is not evenly distributed all across merchants of all sizes. Small merchants, who have less than $1 million in annual sales, reported the highest multiplier this year, at $2.70 per $1 of fraud, compared with $2.00 per $1 for mid-sized merchants (who have $1 million to $49.99 million in annual sales) and $2.30 per $1 for large merchants (who have more than $50 million in annual sales). The report also notes that large e-commerce companies revealed a multiplier this year of $2.20 per $1 of fraud.

The report also breaks out the fraud multiplier figures by retail channels:

• Physical stores, 2.0 ($2.00 per $1 of fraud)

• Multichannel retailers, 2.3

• Mobile commerce, 2.0

• Online-only, 2.4

By retail product and service categories, the fraud multipliers are:

• Toys/hobbies, 3.4

• Hardware/home improvement, 3.4

• General merchandise, 3.1

• Office supplies, 2.9

• Drug/health and beauty, 2.8

• Textiles, apparel, 2.6

• Books, CDs, Videos, DVDs, Music, 2.3

• Computers, electronics, software, 2.3

• Sporting goods, 2.3

• Flowers, gifts, jewelry, 2.2

• Telecommunications/data services, 2.0

• Motor vehicle and parts dealers, 2.0

• Housewares, home furnishings, 1.9

• Restaurants, food and beverages, 1.9

• Hotel, travel services, 1.7

• Digital goods, 2.1

• Physical goods, 2.2

• Both digital and physical goods, 2.2

The report also breaks out types of fraud by total merchants and large e-commerce merchants.

For all merchants, types of fraud break out as follows:

• Lost/stolen goods, 37%

• Fraudulent requests to make purchases, 19%

• I.D. theft, 14%

• “Friendly” fraud, where legitimate payment card holders deny they made a purchase, 20%

• Other, 10%

For large e-commerce merchants:

• Lost/stolen goods, 30%

• Fraudulent requests to make purchases, 21%

• I.D. theft, 20%

• “Friendly” fraud, where legitimate payment card holders deny they made a purchase, 26%

• Other, 3%

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