Are You Prepared for the Holiday Season – A Look at Losses

In a little over a week the holiday selling season will begin. Merchants are so anxious to make sales they are not even waiting for what many people consider the official “Black Friday” to begin. Many national merchants will be open at midnight on Friday with a few even opening at 10:00 PM on Thanksgiving.

Millions of people will be standing in line to get the best deals possible. Merchants will have extra people in place to help handle the needs of the people that are trying to make purchases. Will merchants provide adequate protection for the payment methods the people are using?

I have made purchases at many of the national merchants and when things get busy at the registers validation of the signature on the receipt to the signature on the card being used seems to be forgotten. During the holiday season it is especially important for merchants and individuals to take extra precautions to protect themselves.

A large percentage of many retailers income, comes in the 5-6 weeks between Thanksgiving and Christmas. A look at some of the statistics from the LexisNexis True Cost of Fraud Study will provide how important it is for merchants and consumers alike to take precautions especially during the holiday season. It should be noted that the statistics are from 2008 and fraudulent activity has continued to grow.

1) Merchants are paying $100 billion in fraud losses due to unauthorized transactions and fees/interest associated with chargebacks, nearly ten times the cost incurred by banks. Far surpassing bank costs of approximately $11 billion in 2008, merchant fraud losses also amounted to more than 20 times the total value of consumer losses (approximately $4.8 billion). Factoring in the additional cost of lost/stolen merchandise, U.S. retail merchants are suffering a total industry-wide fraud loss of $191 billion.

2) One in five merchants experienced an increase in unauthorized transactions associated with identity fraud, which this study attributes to economic conditions and increased criminal sophistication. 

3) Changing consumer payment methods requires a dynamic fraud management strategy. Credit card crimes continue to rise sharply, but alternative payments represent a troubling new source of losses for large merchants.  Credit cards are linked to nearly half of all fraudulent transactions for all merchants, and 50% of large retailers saw an upsurge in credit card fraud in 2008. Fraudsters are taking note of nontraditional payment methods: 29% of large retailers already reported an increase in alternative payments fraud during 2008.

4) Friendly fraud accounts for more than one-third of the total fraud for online-accepting merchants.

Consumers are faced with having their credit card information captured by a skimming apparatuses, loss of the data captured by the point of sale machine, system break-ins that can lead to large number of consumers facing identity theft. Once a credit vessel is compromised the thieves are able to easily use the information either by make a physical card or using the information online to drain the monetary value of that credit vessel.

Merchants should have a verification system that is followed for every purchase. Merchants who only rely on the point of sale machine validation are doing themselves and their customers a disservice. I have been involved in a number of investigations where if the POS terminal gave a validation of the card being used, the sale must be good. One major retailer sold thousands of dollars in gift cards in three days to parties who had skimmed charge cards in another state and then made cloned cards to make the gift card purchases. This is a very common way thieves use stolen credit card information.

Because of the increase in sales and the work involved in processing the data in the sales, it may take several days or even several weeks for a cardholder to find out that their card has been compromised. At this time of the year it takes thieves only a few hours or even a few minutes to use up a credit line associated with a payment method. Taking a few simple precautions can continue to make the holiday season a joyous one.

Al Cameron

612-367-7679