Retailers' have a dilemma whose solution will require the most careful of balancing acts.
On one hand, consumers expect to have online and mobile payment technologies available as they increasingly shop from their mobile devices. Indeed, one key recommendation by experts to increase sales is to make the payment process as seamless as possible.
Yet, these technologies directly lead to fraud for the retailer – fraud on the part of their own customers (aka friendly fraud) and from hackers of the ilk that have attacked Target, Home Depot and scores of other stores.
Hence the dilemma. But reading though the lines of two reports chronicling these trends, the barest outline of a solution for retailers begins to emerge.
$11.1B and Counting
First, let's size up the issue for retailers. In a word, it's big.
Existing card fraud accounted for $11.1 billion in losses in 2013, while account takeover fraud — which occurs when a fraudster obtains an individual’s personal information and makes changes to an existing account – resulted in $4.7 billion in losses over the same period, according to the 2014 LexisNexis "True Cost of Fraud Study."
It is even worse for retailers that accept mobile payments or m-commerce merchants, as a related LexisNexis study looking specifically at mobile, calls them.
"This segment of merchants experienced a steep increase over the past year as the percentage of revenue lost to fraud increased 70 percent, from 0.80 percent in 2013 to 1.36 percent in 2014," it found.
"The reason for m-commerce merchants' higher losses to fraud is simple: They experience a higher volume of fraudulent transactions. Despite preventing 53 percent of fraud attempts against them, they report a significantly higher number of successful fraudulent transactions compared with all merchants (850 successful fraudulent transactions vs. 133 reported by all merchants)," the report said.
$4T and Counting
Now weigh those numbers against the some 88 percent of visitors that have abandoned their shopping cart last year, by PayPal's reckoning. Each of these carts was worth $109, adding up to about $4 trillion worldwide. It is widely understood that some, if not much, of these lost revenues could be recovered if retailers made the payment process more seamless and easier for consumers.
Herein lies the problem. Friendly fraud makes up a sizeable percentage — 24 percent according to LexisNexis — of the aforementioned overall losses due to fraud. It must be noted, though, that not all friendly fraud is deliberate; in some cases the consumer is legitimately confused. Perhaps he doesn’t recognize the retailer's name of a legitimate charge or perhaps someone in her household made the purchase instead.
Throwing in the possibility that the friendly fraud may be an honest mistake makes this problem even more vexing for retailers: reduce the fraud and resulting losses or make transactions and customer service as seamless and friendly as possible. Admittedly these two goals are in conflict, but they are not mutually exclusive.
Nuggets of data from the LexisNexis' reports suggest how retailers can carefully thread this particular needle.
1. Better Data About Users' Devices
This would have to be opt-in, of course, but retailers that can more closely tie the legitimate customer to his or her device make these transactions irrefutable.
2. Better Tracking
This is more an issue for the financial institutions that process these payments, but LexisNexis highlights that good communication between banks and retailers is necessary to fight payments fraud. Unfortunately with m-commerce in particular, there is a significant disconnect between these parties.
Financial institutions generally do not track mobile channel fraud separately from the online channel—data that would be very helpful in fighting fraud.
"The reasons financial institution executives cite for not tracking mobile fraud are twofold: Mobile channel payments are not big enough yet, and they are not significantly different from online channel payments to make tracking separate channels worthwhile."
The burgeoning volume of m-commerce may soon invalidate the first reason, the report concluded.
3. Biometric Solutions
Biometric-based solutions are more feasible for merchants as more and more of these smartphones are equipped with the necessary technology.
"Device fingerprinting, for instance, is among the best-suited solutions for mobile device authentication," LexisNexis said. "Device identification can be used with both m-commerce card transactions and alternative payments, along with the benefit of being invisible to the consumer and adding no friction to the checkout process."