Responding to consumers' increasing mobile device usage, more retailers of all sizes and types are relying on mobile purchases, with nearly 1 in 10 merchants accepting mobile payments in 2013, an increase of 50% per year since 2011. But the increase in mobile payments is also increasing the risk of fraud, especially for small merchants that might be less aware of fraud detection schemes, according to “The True Cost of Fraud” study, conducted by Lexis-Nexis and Javelin Strategy & Research.

Mobile browers, mobile applications and mobile point-of-sale (mPOS) hardware technology such as Square have put mobile payments within the reach of even the smallest merchants (less than $1 million in annual sales), 39% of whom are attracted to the mobile channel. And the trend is growing: 25% of merchants of all sizes expect to accept mobile payments in 2014, with mPOS poised to generate the biggest growth: 7% of merchants used mPOS devices in 2013, after no merchants reporting using it in 2012.

This represents a diversification to different types of businesses, such as clothing and accessories retailers and food and beverage stores, besides the non-store retailers and electronic goods merchants which initially used mobile payments.

But smaller mobile merchants typically rely on fewer fraud technology solutions, making them especially vulnerable to fraud.

The study also highlighted:

  • Fraud against mobile merchants is more pervasive in credit card fraud than debit card fraud. Nearly three in five fraudulent transactions were credit card based, while only 23% were attributable to debit cards.
  • Although merchants view them as a higher fraud risk, mobile browsers are still the most commonly utilized method of accepting mobile payments; 55% of merchants use them.
  • Twenty-one percent of mobile merchants name “preventing identity fraud” as their top challenge, compared with only 17% of all merchants.

The study also highlighted recommendations to help combat fraud:

  • Mobile merchants selling digital goods can limit their fraud costs by thoroughly authenticating card-not-present transactions through mobile devices.
  • Merchants should track fraudulent activities by each channel they offer. Currently, only 48% of mobile merchants do so.
  • Maintain open communications with financial institutions and other mobile merchants to better understand the evolving nature of fraud threats and solutions. Organizations like the Merchant Risk Council provide forums for sharing expertise and assessing concerns.

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Giving the customers what they want

When asked the reasons for adopting mobile payment, businesses of all sizes cited convenience for the customer as the main driver. Larger retailers also use mobile payment for growing their businesses and staying competitive in the market.


Small merchants, big losses

Although smaller businesses are flocking to mobile payments, they also stand to lose more, since a single fraudulent transaction can constitute a higher share of revenue.

Smaller merchants are also less likely to protect themselves from mobile fraud through anti-fraud technology, with most citing prevention as being too expensive, compared with larger merchants.

Methods of mobile payment

Although smaller merchants ar emore likely to accept mobile-brower and app payments, mPOS use is growing, especially among small mobile merchants.

And because small mobile merchants accept many mobile payment types, they are susceptible to both online and in-person fraud.


Anti-fraud technology: Too expensive?

Small merchants are less likely to adopt anti-fraud technology solutions like card verification value, PIN and/or signature authentication, transaction verification and other techniques.

For a complete copy of the study, go to the LexisNexis site.

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