The Prevalence of E-commerce and M-commerce Fraud
Whenever fraud occurs, it is essential that a company executes an immediate response. This would, in turn, prevent the erosion of trust between the company and its customers, as well as ensure that the bottom line is well-protected.
In the current landscape, e-commerce and mobile transactions are increasing in popularity among merchants and their customers.
According to a study conducted by LexisNexis, when it comes to the increase of mobile transactions, merchants who have adopted selling digital goods have increased from 57 per cent to 70 per cent. In this case, the term “adoption” refers to a means of business growth through the increase of new customers and improve the connection between current customers with the merchant. Through mobile transactions and the sale of its associated digital goods, merchants noted an increase of efficiency by virtue of a faster transaction process.
However, it should be noted that there is a cost that comes with selling digital goods via mobile transactions. For instance, the LexisNexis study found that retail fraud has had a continuous increase year-over-year. “And, the level of fraud as a percentage of revenues has moved upwards (1.58 [per cent] to 1.80 [per cent] on average),” the study noted.
In addition, merchants who sell digital goods are being subjected to higher fraud costs compared to other channels. According to the study, the cost of fraud represents 2.10 per cent of merchants’ annual revenue affected by mobile-purchased digital goods.
“And, every $1 of fraud costs these merchants an average of $3.29, which is a 24 [per cent] increase over 2017,” the study found. Comparatively, this is much higher to the $2.78 when it comes to mobile commerce merchants who are only selling physical goods.
Identity fraud is another issue that merchants who are selling digital goods must tackle in order to maintain good business practices. For instance, the study found that 39 per cent of revenue loss attributed to fraud is caused by identity theft.
Therefore, it is integral for merchants to find effective payment strategies for the sake of fraud prevention.
The Key Perpetrators of Fraud
In order to properly execute fraud prevention methods, a business owner must first understand the reasoning behind the theft of monetary values. There is no all-encompassing reason as to why people commit fraud, as the explanations point to several factors.
Typically, however, fraud occurs based on opportunity, motivation, and rationalization. This is in accordance to a study conducted by Donald Cressey, the criminologist who developed and coined the term “fraud triangle.”
According to Cressey’s research and his interviews with embezzlers, people commit fraud based on the opportunity to do it in the first place. If a company has a weak system when it comes to internal controls, for instance, employees may be tempted by the opportunity. A business owner should then create clear company policies that have equally as clear consequences should they not be followed by employees.
Let’s say an individual has gained tenure within a company by virtue of working there for a long period of time. The individual’s bosses, therefore, hold them in their highest regards based on their experience and familiarity with the company itself.
Along with this high level of regard, there is also a great amount of personal trust. Therefore, the individual has been trusted with business cheque books when it comes to billing and personal finances. Seeing this opportunity, the individual would then forge signatures and issue checks to themselves, ultimately contributing to payment fraud.
As for an individual’s motivations, they may have a personal situation that requires a need for large monetary values. These situations can range from gambling addictions to medical emergencies and the financial difficulties of a significant other.
Greed is another potential motivator, where an individual commits fraud not out of need, but rather the desire for items such as luxury goods. In turn, the psychological effects can lead to addiction and the inability to stop committing fraud.
Another key element that contributes to the reasoning behind why an individual would commit fraud is rationalization. It should be noted, however, that this also requires the benefits to outweigh the possibility of detection.
This is in addition to the justification for fraud in the first place. For instance, an individual may feel entitled to more compensation at their job. Another possibility is that an individual may feel dissatisfied about the trajectory of their position and the company.
For example, let’s say an individual justifies their actions by convincing themselves that the fraudulent payments are out of necessity for the success of the company itself. This justification can also be coupled with the belief that they deserve to take funds because they have dedicated numerous years into the business. The individual may convince themselves to believe that the company’s profits are so great that missing sums would not be noticed by others and that the company can lose that sum without much consequence.
Given these opportunities, motivators, and rationalization strategies at play, business owners should therefore look for effective fraud prevention strategies and solutions.
Fraud Prevention Strategies and Solutions
There are several fraud prevention strategies and solutions currently out there on the market. While a business owner can take on preliminary fraud assessments as one option, another possibility is through working with fraud prevention services that offer specific products.
In terms of fraud assessments, a business owner can first take a deeper look into the landscape of their company in order to understand the current opportunities for fraud. One such landscape pertains to a company’s own social culture.
Whether or not a company has an environment that is of low or high risk for fraud depends on the ethical standards it practices and perpetuates. A company’s employees with higher tenure may typically suffer more lenient consequences. Similarly, petty theft can be committed by other employees on a consistent basis if not nipped in the bud with the appropriate consequences. With well-defined ethics and policies, as well as proper follow through, a business owner can decrease the likeliness of fraud from the get-go.
Another means of effective fraud assessment is to conduct them on a consistent basis, as well as make sure that particular employees are aware of and know how to watch out for fraud risks. Employees, for example, can be informed of fraud risks through formal training, meetings, posters around the office, as well as a clear understanding of payroll rules.
In addition, a business owner can encourage whistleblowing to prevent fraud. However, it should be noted that there are challenges that come with this method of choice. The individual in question may experience conflicting emotions when it comes to co-worker or familial loyalty, as well as be subjected to jealousy and therefore file false reports. A way to overcome these challenges is for a company to have a culture of open communication and transparency.
Of course, verification and scoring tools can be used when it comes to fraud prevention services and products. Services can include comparisons between billing addresses with ones that are already in an issuer’s database. This type of service can involve data authorization requests for a cardholder’s address number and either their postal code or ZIP code.
In terms of fraud scoring tools, they can come in the form of payment processors, Merchant Broker works with its clients to get the best suited versions, as well as the best rates out there on the market. What forms of payment processors can do is go into a database and determine what looks like legitimate transactions. Whether or not a transaction is legitimate can be determined by data such as card security codes, fingerprints, face scans, as well as IP addresses.
Merchant Broker has a team of dedicated experts to help business owners mitigate fraud through the strategies detailed in this paper. To get started and get an in-depth consultation, call 1-888-668-0733 or email info@merchantbroker.com.