Smaller merchants bigger fraud risk

As retailers increasingly look to mobile as a way to generate revenue, fraud threats are impacting merchants to the tune of $283 in fraud costs for every $100 of actual fraud losses through the mobile channel, according to a recent study.

"Mobile payment options and point-of-sale hardware are providing more business opportunities for small merchants," says Dennis Becker, vice president, Corporate Markets and Identity Management Solutions, LexisNexis. "Despite the surge in retailers using mobile payments to conduct business, we've found in our study the unfortunate correlation between the size of the business and the impact of mobile fraud on their business."

Smaller mobile merchants typically rely on fewer fraud technology solutions, meaning they are often more exposed and fraudulent actions against that retailer can have far greater impact on their revenue.

Conducted by LexisNexis and Javelin Strategy & Research, the study highlights key fraud issues effecting mobile retailers, while also articulating ways to combat retail fraud.

The findings in the study show mobile penetration in the retail merchant channel is rapidly growing. Nearly one in ten merchants accepted mobile payments in 2013—an increase of 50% per year since 2011. Twenty-five percent expect to begin accepting mobile payments in 2014.

The mobile browser and mobile applications represent the dominant acceptance channels with 55% and 38% of mobile merchants accepting these channels, respectively. However, the largest growth channel is mPOS (mobile point-of-sale) hardware. Seven percent of merchants used mPOS in 2013 after no merchants reported using it in 2012.

Another key segment that is growing according to the study is small merchants. Thirty-nine percent of them are attracted to the mobile channel, but their fraud levels are high because they are less aware of fraud detection schemes.

The study also highlighted:

• Fraud against mobile merchants is more pervasive in credit card fraud than debit card fraud. Nearly three in five fraudulent transactions were credit card based, while only 23% were attributable to debit cards.

• Although merchants view them as a higher fraud risk, mobile browsers are still the most commonly used method of accepting mobile payments versus mobile apps.

• Mobile merchants face more identity theft than all merchants. They also view identity verification as the most serious fraud-prevention issue.

The study also highlighted recommendations to help combat fraud:

• Mobile merchants selling digital goods can limit their fraud costs by thoroughly authenticating card-not-present transactions through mobile devices.

• Merchants should track fraudulent activities by each channel they offer. Currently, only 48% of mobile merchants reported that they track fraud by payment channel.

• Maintain open communications with financial institutions and other mobile merchants to better understand the evolving nature of fraud threats and solutions. Consortia such as the Merchant Risk Council provide forums for sharing expertise and assessing concerns.