Fraud is Taking a Financial Toll on the Retail Industry

The retail industry is impacted by fraud every day — and oftentimes every hour — as incidents continue to run rampant. Bad actors infiltrate both small and large businesses regularly, resulting in billions of dollars in losses for retailers each year. In fact, fraud cost Americans nearly $8.8 billion in 2022, with 2.4 million consumers losing money to scams. As retailers turn to technology to improve operations and the customer experience, they’re also relying on it to keep bad actors at bay.

Fraud and Mobile-First Approach 

Retailers have implemented a mobile-first approach to enhance and improve the shopping experience for consumers. But with the introduction of mobile channel transactions, such as instant payments, digital wallets and services like buy now pay later (BNPL), fraudsters are given an array of methods to exploit the retail environment.

The U.S. has witnessed a 20 percent increase in retail fraud since 2019. And the worst part? Fraud carries over a three times multiplier, meaning every dollar lost to fraud costs retailers an average of $3.75.

Notably, in retail, the vast majority of fraud outside of BNPL is return fraud. In fact, 5.9 percent of the 10.9 percent returned transactions in 2020 were fraudulent, resulting in a $25.3 billion loss for retailers. In one case, goods are stolen but rather than selling them on the black market at a discount, fraudsters can simply “return” the item for full value, without receipt.

Digital Transformation and Identity Fraud

As society continues to embrace digital transformation, identity fraud will increase dramatically both in complexity and frequency.

The 2023 State of Identity Fraud Report, detailing the most prevalent tactics used by fraudsters, shows how 53 percent of consumers have had their identity data compromised. Furthermore, 52 percent of consumers are ready to use a digital identity wallet to authenticate their identity. The same report identifies retail and e-commerce as one of the top industries most impacted by fraud attacks.

Synthetic identity fraud — the fastest-growing type of identity theft in the U.S. — is especially difficult to detect because of its complexity and the rapid use of “faceless” business methods. Synthetic identity fraud is a complex form of identity theft created by combining personally identifiable information to fabricate an individual or organization to commit a dishonest act for personal or financial gain. The rise of faceless online transactions has grown increasingly popular since the pandemic. By interacting remotely on a regular basis, consumers might not actually see the representative they’re speaking to, and this online anonymity opens doors for scammers to exploit both retailers and consumers.

Identity theft and synthetic identity fraud are directly correlated with fraud in the retail sector and should be the two biggest fraud concerns for retailers. Considering payments are spread across multiple transactions, there's an expanding opportunity for bad actors to breach data.

Retailers Can Stay Ahead of Fraud

Fortunately, retailers can use advanced artificial intelligence identity verification and machine learning models to navigate large volumes of transactions within the industry and uncover suspicious or unusual behavior that might indicate fraud. These tools help detect fraudulent activity in real time, with added defenses and mechanisms like fraud detection software, which allow for counter fraud attacks to ensure safety and security for businesses and their customers.

The dramatic increase in identity fraud signals how important it is for retailers to equip themselves with the tools required to fend off the most complex fraudsters. Select fraud detection and identity verification providers can help retail businesses stay one step ahead of bad actors, especially now that digital transformation has impacted this industry so rapidly.

Blair Cohen is the founder and president of AuthenticID, a disruptive and transformational identity proofing and fraud prevention technology company.