Abstract
NEW RESEARCH REPORT BY MERCATOR ADVISORY GROUP
This report examines the incidence of a range of card fraud types, such as
issuer and online retailer fraud losses, as well as less well defined or
publicized fraud activities. Topics explored included:
- While credit card and other types of financial fraud are detected and
reported within organizational product and business line silos, fraud follows
a dynamic "balloon effect", migrating to less well defended areas.
- Large financial institutions may envision a more comprehensive approach to
detection of fraud and financial crimes, but organizational commitment and
solution development typically lag the balloon effects of fraud.
- While the credit card industry and online merchants focus on narrow fraud
metrics, the uncounted costs of fraud, their "dark numbers," are in all
likelihood significantly larger.
- Credit card issuers are demonstrating an ability to manage transaction and
application fraud within sustainable parameters.
- Online merchants, after significant investment in fraud solutions, are
similarly moving toward a sustainable fraud level, despite their rapidly
growing sales volume.
From the standpoint of the credit card industry, the most typically reported
and accepted quantification of card fraud are annual issuer losses. For 2005,
these were estimated at about $1.1 Billion for Visa, MasterCard, American
Express, and Discover combined (source: Nilson Report). Yet this estimate is
clearly just the tip of the fraud iceberg, which affects issuers, merchants,
and consumers. While the costs of some frauds can be measured, others
comprise the unreported and unmeasured "dark numbers of fraud." Ken
Paterson, Director of the Credit Advisory Service at Mercator Advisory
Group and the author of the report comments that, "the dark numbers of
fraud, while by definition unknown, are surely the largest. A significant
component is the opportunity cost incurred by both merchants and credit card
issuers in declining transactions that are suspected as fraudulent but are in
fact legitimate (perhaps 4 out of 5 transactions that are declined by online
merchants), as well as potential shopping behavior that is dissuaded by
consumer fear of fraud."
Unreported and undetected fraud at issuers is also certainly significant, and
probably ends up classified as a credit loss. Fraud may end up in the
collections file, potentially inseparable from bad debt. Indirect
victimization costs should be considered. Among individuals, the direct
financial costs of investigation, recovery, and credit record repair are
included, as well as the "soft" costs of personal time and anguish spent on
recovery.
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