Dec 06, 2017

The True Cost of Fraud

By Jarrod Upton

According to Dictionary.com, fraud is defined as “wrongful or criminal deception intended to result in financial or personal gain.” Unfortunately, in today’s digital world, with so much of our personal information online, we are all potential victims of fraud from hackers who are able to access and steal our personal information for their financial gain.

Recently, the most glaring example of this was the Equifax data breach (click on the link to see if you’ve been impacted) where 143 million customers had their sensitive personal information exposed. According to a blog posted on the Federal Trade Commission website, “the hackers accessed people’s names, Social Security numbers, birth dates, addresses and, in some instances, driver’s license numbers. They also stole credit card numbers for about 209,000 people.”

In addition to whatever harm we might suffer personally as a victim of fraud, as a society, we are also paying a collective price from the financial damages American businesses incur as a result of a hack attack. According to a company called IdentityForce, reported data breaches increased by 40% in 2016. Yahoo alone announced the largest data breach in history last year – an attack that affected more than one billion accounts. You can also find on IdentityForce’s website a list of all the data breaches that have occurred so far in 2017. It is a number you might find astounding.

LexisNexis Group is a company that provides Big Data business research, among many other related services. Every year they produce an annual study entitled, The True Cost of Fraud. It is a comprehensive report that details all the costs and consequences that businesses suffer in their battle against fraud. For instance, the study reports that for every dollar of fraud that a company experiences, it costs them $2.66 to manage it.

As an example, if a company experienced a loss of $1000 dollars due to fraud, it will cost them an additional $2,660 dollars to deal with it. And eventually those costs will be passed on to consumers in terms of higher prices for their goods and services.

Another way to look at the effects of fraud on a business is to measure what the costs are as a percentage of revenues. In 2016, the level of fraud was 1.47% of revenues (up from 1.32% in the previous year). This may seem like a small number but it’s actually a huge expense and the numbers are trending upward with each passing year.

Though most companies experience some level of fraud, the percentage is higher among mobile merchants. There is a significantly higher number of lost transactions per month to fraud through mobile commerce, and that number is expected to grow, as mobile commerce continues to expand.

As a result, companies are being forced to make serious investments in fraud mitigation systems. According to the LexisNexis study, nearly two-thirds of large e-commerce and mobile commerce merchants report using an automated system to flag fraud, and over three-fourths employ some kind of fraud mitigation system – often employing multiple solutions simultaneously.

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However, these various fraud management tools seem to offer only modest success. Often they produce false positive rates of fraud which means that nearly half of all transactions flagged as potentially fraudulent are ultimately determined by human beings, which increases costs. Not surprisingly, some companies are frustrated that the costs of managing fraud are both excessive and ineffective, though they have little choice but to continue their efforts.

Though companies that conduct business online experience a higher rate of fraud, it is still necessary for businesses to remain vigilant about other forms of fraud. Companies are forced to deal with the consequences of lost or stolen merchandise, fraudulent requests for a refund or return, unauthorized transactions and bounced checks, not to mention insider fraud or employee theft.

The issue of fraud is a huge concern for companies and they are engaged in a relentless battle with hackers and thieves on a global scale. As the fraudsters become more sophisticated in their approaches and attacks, so too must companies evolve to combat them. It is an expensive struggle and unfortunately, it doesn’t seem likely to abate any time soon.

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