True Cost Of Fraud

True Cost Of Fraud

True Cost Of Fraud – 2015 LexisNexis Risk Solutions

Merchants Contend with Increasing Fraud Losses as Remote Channels Prove Especially Challenging

True Cost Of Fraud – Introduction

The annual LexisNexis® Risk Solutions study establishes the “true cost” of fraud as borne by U.S. merchants, along with key findings, and provides specific guidance for the industry. Recommendations for successfully mitigating these costs are presented based on an analysis of the underlying drivers of fraud, how different merchant segments are responding to these challenges, and through insight from financial industry leaders.

The key question that this report addresses for merchants is, “How do I grow my business and manage the true cost of fraud while strengthening customer trust and loyalty?”

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Fraud definition

For the purpose of this study, fraud is defined as the following:

  • Fraudulent and/or unauthorized transactions
  • Fraudulent requests for a refund/return; bounced checks
  • Lost or stolen merchandise, as well as redistribution costs associated with redelivering purchased items (including carrier fraud)

This research covers consumer-facing retail fraud methods and does not include information on insider fraud or employee theft.

Merchant definitions

  • LexisNexis Fraud MultiplierSM is the total amount of costs related to fees, interest, merchandise replacement and redistribution per dollar of fraud for which the merchant is held liable.
  • Small merchants earn less than $1 million in average annual sales.
  • Medium-size merchants earn $1 million to less than $50 million in average in annual sales.
  • Large merchants earn $50 million or more in annual sales.
  • International merchants operate from the U.S. and do business globally.
  • Domestic merchants do not sell merchandise outside the U.S.
  • Large eCommerce merchants accept payments through multiple channels but maintain a strong online presence, earning 10% to 100% of their revenue from the online channel and earning $50 million or more in annual sales.

True Cost Of Fraud

Executive Summary


Merchants experienced increased fraud losses again in 2015, and combatted challenges in a variety of areas that contributed to higher overall fraud mitigation costs and efforts. They lost an average of 1.32% of revenue to fraud and fraud related costs, a whopping 94% increase compared to 2014. The overall morale of merchants understandably took a hit as they not only dealt with increased fraud losses but also invested considerably more in fraud prevention to no avail — and sometimes to their detriment. Despite the use of automated systems in an attempt to more accurately and efficiently decision transactions, nearly three-fourths of all transactions flagged for fraud ended up requiring costly human intervention. Facing these and other challenges of online fraud (which is expected to continue to grow over the next few years), merchants have a daunting task in outpacing fraudsters.

True Cost Of Fraud

Key findings

The LexisNexis Fraud MultiplierSM hit an all-time low in 2015. Due to a surge in fraud through remote channels, merchants were liable for a greater proportion of charge-backs increasing their overall fraud losses and driving their costs per dollar lost to fraud lower.

Compared to online-only merchants, diversified merchants were spared the brunt of fraud through remote channels. An increase in fraud through remote channels caused an uptick in chargebacks, but this was dampened through the acceptance of varied payment channels by large eCommerce, mCommerce and international merchants.

2015 was an especially demoralizing year for merchants as fraud consumed even more revenue. All merchant segments were losing more revenue to fraud in 2015 and in the face of these losses more merchants believe that the additional costs of mitigation were prohibitive in 2015.

True Cost Of Fraud

Compared to other merchant segments, large eCommerce merchants are most demoralized. This attitude makes sense given that merchants in this segment spend $115k annually on fraud mitigation while losing 1.39% revenue to fraud and its related costs, on average.

Merchants prevented more fradulent transactions overall, but online and Mail Order/Telephone Order (MOTO) transactions proved considerably more challenging. While merchants prevented more fraudulent transactions overall in the past year, merchants found it up to 7x more difficult to prevent transactions through remote channels compared to in-person.

Fraud mitigation is an excessively manual process. Even among the 25% of merchants using an automated system to flag fraud, three quarters of transactions flagged as fraudulent are ultimately decisioned by human beings.

True Cost Of Fraud

Despite all of the effort dedicated to preventing fraud, a quarter of declines are false positives. The level of human effort involved in mitigating fraud is all the more troubling since roughly a quarter of declined transactions end up as false positives.

International merchants face the most acute false positive problem. This problem is sorely felt by international merchants, who decline the highest percentage of flagged transactions (27%), and were 4x as likely to list excessive manual orders as their top fraud mitigation challenge compared to 2014.

In-store pickups facilitate considerable shrink. In-store merchandise pickups, designed to increase convenience and efficiency, constitute a quarter of lost and stolen merchandise (shrink) among all major merchant segments.

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