Online Fraud – What is the Real Financial Impact?

Has the internet increased debit and credit card fraud? Is fraud caused by outdated legislation? Is fraud a thing of the past?

The world of payments is a dynamically evolving ecosystem that has been driven by changes in technology, changes in consumer behaviour and in turn changes in the way in which fraud is committed.

The cost of debit and credit card related fraud in the UK peaked in 2008 at £609.9M*. At this time the amount allocated to ecommerce fraud was £181.7M*, a sharp rise from £46M in 2003. This rise reflected the dramatic increase in online spend and the ‘ease’ of fraud in the early days of ecommerce.

A change in legislation in 2009 (the Banking Code ), “until 1 November 2009, banks’ legal liability in cases of unauthorised use of card accounts was subject to terms of the voluntary Banking Code, and in many cases banks refused to reimburse cardholders who reported unauthorised card use, claiming that their systems could not fail and consequently the cardholder must have acted “without reasonable care””**, helped deal with a number of fraud issues as banks took more responsibility for tracking fraudulent behaviour.

This change in banking policy began to drive down the total amount of fraud since 2008. However, over the last few years this volume has started to increase again with the figure standing at £163.2M. Assuming this growth continues then this figure could reach £224M by the end of 2015. Is this reflective of the way in which fraud is committed? The increase is reflective of the overall increase in online spend rather than an increase in fraud (as a percentage).

 online fraud

Data from IMRG – Cap Gemini e-Retail Sales Index 

 online fraud 2

Ecommerce fraud (CNP) estimated* based upon data from Fraud the facts 2014 and Secure Trading projections for 2014 and 2015 assuming fraud growth directly linked to online retail growth.

Common examples of how fraud is committed:

Card holder not present

In most cases this fraud is carried out after the fraudsters have been able to gain a person’s card details enabling them to order products and services for delivery to a location of their choice.

This could be online, phone or mail order. Card holder records are also collected via card skimming and malware.

Online Shopping Fraud

Like auction fraud, it is not uncommon for online shopping fraud to leave purchasers without the products they ordered or claims by the seller that they didn’t receive payment. Fake or counterfeit items are also often delivered. In some cases not all information is provided about the product or the terms of sale are not disclosed.

Top Tip: does the site have a postal address and telephone number? Is the product branded? If so, is it much cheaper than normal?

There is also a risk with this type of fraud that the purchasers’ details could be comprised by the fraudsters and then used for further fraud.

Internet Auction Fraud

This form of fraud involves the purchase of goods and service via internet auction sites. Typically the purchaser does not receive the goods. The products may also be fake or stolen goods. Other examples include the products not matching descriptions or the value of the product being significantly less than that paid.

Perpetrators of the fraud often use Western Union or MoneyGram to take payments as this allows anonymity.

Card ID Theft

It is possible for fraudsters to fraudulently obtain card or card details, along with stolen personal information, to open or take over a card account held in someone else’s name.

In conclusion it is unlikely that fraud is going away, but legislation will continue to be improved in order to protect the consumer, the retailer and the major banks. Technology is constantly being developed to improve security look out for biometrics, enhanced location based tech and the next big thing.

*Fraud The Facts 2014 The definitive overview of payment industry fraud and measures to prevent it. Financial Fraud Action UK

** http://en.wikipedia.org/wiki/Chip_and_PIN