Fraudsters seem to have embraced the Puritan work ethic: Idle hands are the devil’s workshop. And they’ve been anything but idle. The hot-off-the-presses Global Fraud Attack Index™ shows that fraud attacks have jumped 137 percent over the four quarters ending March 2016. The index reveals the tools the fraudsters are using to launch their attacks and what merchant segments they seem most enamored with.
Fraud attempts can be time-consuming, forcing businesses to spend hours dealing with the effects of a security breach instead of serving customers and building new revenue streams. They can also be embarrassing, particularly if the incident damages customer confidence.
More than anything, though, fraud can be very costly.
According to the Association of Certified Fraud Examiners, the money lost by businesses to fraudsters amounts to over $3.5 trillion each year. And as the Global Fraud Attack Index™, a PYMNTS/Forter collaboration, illustrates, the cost of fraud is only accelerating; it’s getting more expensive, it’s happening more often and the number of account takeovers is rising dramatically.
As a VP and vertical leader for financial services at Convergys, Ron Andrews is well-versed in the latest trends in fraud and security and knows just how damaging fraud attempts can be. PYMNTS recently caught up with Andrews to discuss the rising costs of fraud for businesses.
Andrews said that fraudsters are becoming more sophisticated, and there can be a steep price to pay, both in the physical money lost and the great cost of losing customer trust and loyalty.
Fraudsters Are Getting Smarter And Attacking More Often
The Q3 Global Fraud Attack Index data indicates that instances of fraud are on the rise, growing by 126 percent in the last year. Fraud attacks more than doubled between Q2 2015 and Q1 2016, and attacks also rose 27 percent from Q4 2015 to Q1 2016.
Andrews noted that an increase in fraud attacks has become more visible during this period. To combat this, companies are working to deal with new challenges posed by the rising amount of security breaches.
“In terms of identity fraud, we’re certainly hearing about an increase in that space, and some of that is EMV-related,” Andrews said, noting that last September’s transition to EMV security caused some complications for merchants and security teams looking to keep fraudsters out. “We’re adding to the capacity of the network in order to handle the fraud increases that our clients receive.”
Account takeovers are quickly emerging to become one of the most common forms of fraud, according to the latest index findings. As of Q1 2016, they accounted for 2 percent of fraud activity in Europe, 4 percent in the United States and more than 25 percent of attempts around the world.
“Account takeover is out there, and it’s real,” Andrews said. “There’s a need for all companies — not only in this industry, but everywhere — to protect themselves and protect the transaction and protect the customer information going back and forth.”
Fraud’s Growing Price Tag
As if an increase in the number of fraud attempts wasn’t worrisome enough, the cost of dealing with those fraud attempts is also on the rise. According to the index, the reach of fraud attacks has grown substantially from the beginning of 2015, when less than $2 out of every $100 was subject to a fraud attack. In Q1 2016, the reach of fraud attacks climbed to affect more than $7 out of every $100.
Fraud’s increasing cost is, in large part, tied to the progression of fraud prevention, Andrews explained. As hackers and other bad actors become more sophisticated, merchants and security firms have to invest more money to stop them.“This is an evolution from the early days of fraud detection systems, running and catching frauds in the earliest days of authentication,” he said.
Andrews also pointed out that bleeding profits at the point of sale are a big problem for merchants. Businesses are continually losing their sales revenue because protection and control measures still need to be put in place to help safeguard customers both in-store and online, he said.
Whether businesses are forced to pay more to deal with the effects of a fraud attack, lose money due to a security breach or are unable to authenticate a customer, resulting in a lost opportunity at the point of sale, Andrews said, the rising cost of fraud gravely affects the health of a business.
“There’s a real cost in terms of the call to run the authentication,” Andrews emphasized. “The impacts are real, and they hit the bottom line.”
The Customer Cost Of Fraud
As fraudsters have evolved to become more intelligent and sophisticated, companies have had to put sophisticated fraud prevention tactics in place to deal with an increasingly intelligent and innovative group of bad actors. That often causes frustration and even embarrassment for customers who have to deal with more stringent security, and Andrews said those feelings can also hit a company’s bottom line.
“Making somebody prove they are who they say they are creates an awkwardness at the beginning of a customer service transaction,” Andrews said. “It means I don’t trust you until you prove to me this information and answer these questions. If you don’t, I’m not going to service you.”
For many consumers, the inconvenience arising from additional fraud screening steps could even change their brand loyalties. And even though such frustration might not necessarily lead customers to cancel their account right away, they can seriously affect their trust in a company and their shopping habits, according to Andrews.
“I think it’s easy to reach into the wallet, grab that second card and not go back to the one you’ve been using all these years,” he said.
Is A Better Way On The Way?
For merchants looking to balance protection from these more expensive and frequent fraud attacks with a straightforward and pleasant customer experience, there are some good examples to follow, Andrews pointed out.
He said that companies need to work with customers so they feel confident fraudsters are being kept at bay.
“Some applications are quite good,” he said, citing methods like text messages or other alerts that ask customers to let a bank know if a particular purchase was authorized. “I think, when those work well, it is likely the customer is very satisfied.”
There is also a chance for companies to differentiate themselves from competitors in the space and establish trust and appreciation among consumers by allowing customers a “quick path in.”
Mobile device recognition technology is one such tool that allows extension of a safe, reliable and convenient customer authentication experience. In the future, it holds the potential of allowing merchants to attach customer authentication and history information to a mobile device.
“If they could tie device reputation and actual commercial transaction data from merchants, it would be great that the network would know that this is an authenticated customer and that this is a usual transaction for them,” Andrews said. “Clearly, the best authentication is invisible to the customer. It happens behind the scenes. That’s why the industry is so excited about voice and mobile device reputation.”
So, as it turns out, companies determined to keep their profits intact and customers happy may find the best bet is relying on mobile technology.
About The Index
Quarterly, the PYMNTS and Forter Global Fraud Attack Index™ analyzes fraud attempts on U.S. merchant websites, reflected as a percent of U.S. sales transactions, and tracks what’s trending. Have the attacks gone up? Down? Stable?
That’s pretty critical since the key to preventing fraud is understanding where fraud is originating, what tools the fraudsters are using and which industries and areas they are targeting.
The Global Fraud Attack Index reports this in several ways. Each index includes a metric which quantifies the rate of fraud attempts on U.S. online merchants and how that changes over time. The index examines different aspects of fraud, like which countries or regions are most seriously threatened by fraud and which industries should take a closer look at what’s happening around them. It also explores what can be done to stop or slow down fraud trends and how those methods are (or are not) working.
To download the 2016 Q3 PYMNTS Global Fraud Attack Index™, powered by Forter, click the button below.