September 28, 2012, 9:16 AM

Fraud hits large web retailers harder than small fry

More merchants also accept mobile payments, according to LexisNexis.

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On average, large e-retailers—those with $50 million or more in annual sales—are losing more dollars per fraudulent transaction than are other merchants, $219 compared with $120, according to the 2012 True Cost of Fraud report by LexisNexis.

LexisNexis in May surveyed 1,030 U.S. merchants, including small (less than $1 million annual sales), medium (less than $50 million in annual sales) and large retailers representing a mix of e-commerce, multichannel, mobile, international and domestic-only sellers. The firm also interviewed executives at financial institutions and analyzed identity fraud victim data from more than 5,000 U.S. adults.

Larger e-retailers may be losing more because they more often sell high-ticket items and are thus less likely to automatically flag higher-value transactions, the research firm says. While the average fraud rate for all merchants is 0.54% of total revenue, large e-retailers are losing 0.60% of revenue to fraud; mobile-payment accepting merchants 0.64%, and international merchants 0.74%, LexisNexis says.

Criminals target international sellers more than five times as often as other merchants, the study says. International merchants may seem like easier prey because it can be harder to verify identity and address information when the buyer and seller are not in the same country, the authors say. They are also likely to be spreading their fraud prevention resources across more channels and geographies compared to others, the authors add, which can reduce the efficacy of those systems.

Of the merchants in the study, 6% accept mobile payments, up from 4% last year. 17% that do not say they plan to start doing so in the next 12 months, LexisNexis says. Large e-retailers and international sellers are the biggest mobile commerce adopters, at 23% and 17%, respectively.

The study’s researchers say that criminals are shifting their attention to merchants who offer multiple forms of payment more than in the past, they say. Although many merchants are still determining the best methods of protecting mobile transactions, they add, the channel can help improve security. That’s because consumers that have set up mobile wallets on their devices may use one-time passwords for payments, which makes it harder for a criminal to capture a credit card number in an m-commerce transaction.

“It’s a very good antidote to fraud,” says Steve Mott, a payments industry investor and consultant. “They disguise or encrypt the credentials so they can only be used one time or in ways that the account holder can verify. A user can also do things like get a text if anyone ever uses these credentials and immediately turn them off.”

In addition to having security systems and procedures in place, a fighting attitude may help retailers prevent fraud: Retailers who reported thinking of fraud as inevitable had higher fraud rates on average as a percentage of total revenue, 0.65%, the report says, versus those who were neutral, 0.58%, and those who said it was not inevitable, 0.52%.

LexisNexis also says that fraud protection significantly impacts merchants’ reputations as well as their bottom lines—33% of consumers reported that they avoid certain merchants as a result of being defrauded and 37% say they avoid online registration forms requesting personal information because they were defrauded. In 2011, 41% of fraud victims who responded to a LexisNexis survey about how their stolen data was misused said that a criminal used their personal data to make fraudulent purchases online, surpassing reports of in-person fraud, at 35%, for the first time since LexisNexis began this annual report in 2009, it says.

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