As mobile payment options become more prevalent among small businesses, so too do the opportunities for fraud, new research shows.
A study by LexisNexis and Javelin Strategy & Research discovered that smaller mobile merchants — small businesses that accept at least one type of payment through either mobile browsers, mobile applications or mobile point-of-sale systems — rely on fewer fraud-prevention solutions, meaning they are often more exposed to deceptive schemes.
Specifically, smaller mobile merchants use an average just two different types of fraud-technology solutions, compared with an average of four types for larger businesses. Fraud-technology prevention includes such tools as PIN and signature authentication, check verification services, transaction and customer profile databases, browser/malware tracking, IP geolocation and real-time transaction tracking tools.
The use of more prevention techniques is helping larger businesses stop significantly more mobile fraud attempts than small businesses. The research revealed that large retailers that accept mobile payments prevent nearly eight times as many fraudulent transactions as smaller merchants do.
"Mobile payment options and point-of-sale hardware are providing more business opportunities for small merchants," said Dennis Becker, vice president of corporate markets and identity management solutions for 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."
The study found that mobile fraudulent transactions result in nearly three times the cost of the actual product stolen. That means that forevery $1 worth of product that is stolen, the merchant experiences additional costs for things like chargeback fees, payment-processing expenses, fraud investigation and restocking of lost merchandise. On average, the total of direct and indirect costs equals $283 lost for every $100 of direct fraud loss, the study found.
Overall, 22 percent of the mobile merchants surveyed said fraud incidents increased over the last year, compared with just 6 percent who said incidents dropped in 2013.
The research shows that credit-card fraud is one of the largest threats facing mobile merchants. Nearly three in five fraudulent transactions were credit-card-based, while only 23 percent were attributable to debit cards.
Identity theft is also a major problem for mobile merchants. The study discovered that 21 percent of mobile merchants have experienced fraud via identity theft, compared with just 17 percent of all retailers.
The researchers offered several recommendations to help mobile merchants combat fraud:
Mobile merchants selling digital goods should thoroughly authenticate card-not-present transactions through mobile devices. Mobile e-commerce merchants should take extra care to verify the identity of both the consumer and the device, to mitigate fraud through identity theft.
Combine a mobile app with strong authentication to counter the threats of payment compromise and identity fraud. With authentication solutions, such as device fingerprinting, merchants can establish identity while protecting consumer payment data.
Identify fraudulent mobile transactions separately from online transactions, to better understand the risk and mechanisms associated with the channel. In the study, only 48 percent of mobile merchants said 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. Groups such as the Merchant Risk Council provide forums for sharing expertise and assessing concerns.
The study was based on surveys of 1,139 risk and fraud decision makers and influencers. They included representatives from companies of all sizes, industry segments, channels and payment methods.
Originally published on Business News Daily.