Data: The new pain points of mobile commerce

Published
  • August 01 2018, 11:33am EDT
Mobile e-commerce is growing fast, and online retail fraud levels are keeping pace with this expanded sales volume.

One reason is an increase in digital goods available online—digital gift cards, subscriptions, downloadable software, entertainment and tickets. Criminals have devised new “fast fraud” tricks using synthetic identities, aided by widespread data breaches in the last couple of years; and mass “botnet” attacks, catching many merchants off guard this year, according to a study LexisNexis Risk Solutions released this week.

While the average volume and value of fraudulent transactions has risen over the past year, so has the cost to resolve each case of fraud. Younger consumers—those most prone to making purchases of mobile entertainment and games—are prime targets for the newest types of fraud in mobile e-commerce. And while credit cards are still the top fraud target, alternative payments are getting hit too.
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The size of fraud as part of the total cost of online merchants’ revenue has been creeping upward for the last several years, from 0.51% of total revenue in 2013 to 1.8% this year, based on LexisNexis Risk Solutions' latest survey of 703 risk and fraud executives at retail organizations.

“We began to take notice a few years ago when fraud suddenly was no longer under 1%, but now that the cost of fraud as a percent of revenues is moving closer to 2%, that’s getting into the realm of the how much retailers say they typically pay to accept payments,” said Aaron Press, director of market planning for fraud and identity at LexisNexis Risk Solutions.

The amount merchants pay to cope with each dollar of fraud has been on the rise for the last four years. Based on merchant estimates, it now costs $2.94 to resolve each $1 of online fraud, up from $2.77 last year. That includes the total cost of chargebacks, fees, merchandise redistribution, labor, investigation, legal issues and IT/software security, LexisNexis Risk Solutions said.

Fraud costs are highest for mobile-optimized e-commerce merchants that sell digital goods, according to the study. For midsize to large mobile commerce merchants with digital goods for sale, total fraud costs were $3.29 for each $1 of fraud, up 24% from 2017.

“Digital goods have rapidly gained as a fraud target for popular products like games, music, movies and subscriptions that exist solely in the digital realm," Press said. "Merchants face pressure to deliver these items immediately because of customer demand, so it’s tough to verify the prospective buyer’s identity quickly, and there’s no physical address where the product is sent, creating another security challenge.”

While the individual cost of digital goods may be lower than many physical-goods items sold online, the sheer volume of fraudulent digital goods transactions has risen quickly over the last year, according to LexisNexis Risk Solutions.

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Digital goods are not only driving higher rates of fraud for merchants in the mobile space, but they’re involving more diverse payment types. The latest data from LexisNexis Risk Solutions indicates credit cards sharply rose in popularity for criminals making fraudulent purchases of digital goods, and debit card usage fell slightly. At the same time, alternative payment methods—PayPal, BillMeLater, eBillme and Google—used for fraudulent digital goods transactions rose over the last year.

“Digital goods are seeing slightly higher rates of fraud in alternative payments this year, underscoring the fact that the funding source for digital goods fraud can come from just about anywhere,” Press said.

In the overall U.S. consumer landscape, online purchase scams are now the riskiest form of consumer fraud, bumping three other types that were previously more popular including scams centering on employment, fake checks and home improvement, according to the 2017 Better Business Bureau Scam Tracker released last month.

Credit cards are still the top choice for all online fraud, followed by debit cards, with wire transfers and prepaid cards together accounting for a sizable chunk of fraud, according to the BBB.

Concert and other entertainment tickets are a fast-growing area of digital goods fraud as more consumers use the mobile channel to purchase and download valuable credentials for event entry, according to a survey from Aventus. The U.K.-based firm aims to use blockchain protocol to add security for live-event ticketing through mobile devices with the goal of eliminating counterfeit tickets and scalping.

More than 1 in 10 millennials report having been scammed by ticket fraud, and most are frustrated with the fact that bots routinely purchase the majority of tickets for resale through third-party platforms, each with their own payment and verification systems, according to Aventus. For its recent survey, Aventus polled 1,093 U.S. consumers online in June 2018.