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Digital fraud surpasses physical fraud for first time

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 18 Apr 2024
In SA, 49% of companies reported an increase in fraud in the 12 months prior to the survey.
In SA, 49% of companies reported an increase in fraud in the 12 months prior to the survey.

The rapid adoption of digital technologies is fuelling the rise of fraud in South Africa, according to global data and analytics company LexisNexis Risk Solutions.

It yesterday unveiled the findings of its 2023 LexisNexis True Cost of Fraud Study – Europe, Middle East and Africa (EMEA).

The firm conducted a survey of 1 845 global fraud management decision-makers at financial institutions and retail companies, including 55 in South Africa. Data collection and survey questions reference a 12-month period. The study leverages data and analysis to understand the current state of fraud and the challenges associated with digital payments in emerging markets.

The annual report, based on a commissioned survey conducted by Forrester Consulting, reveals that businesses in EMEA now bear a cost of fraud that is 3.90 times the face value lost in fraudulent transactions.

In South Africa, it says, 49% of companies reported an increase in fraud in the 12 months prior to the survey, while organisations incur an average cost of R3.64 (R3.10 for retailers and R4.52 for financial institutions) for every rand lost to fraud.

These costs encompass financial losses due to fraud, as well as internal labour expenses, external costs, interest and fees, along with the expenses associated with replacing or redistributing lost or stolen merchandise.

While rapid adoption of digital payments improves payment experiences, LexisNexis points out that it also exposes numerous systems and channels to more innovative fraud attacks.

Exploiting anonymity

Across EMEA, it says digital channels account for 52% of overall fraud losses, surpassing physical fraud for the first time.

Consequently, the firm notes that cyber criminals exploit the anonymity of digital, cross-border transactions to execute fast and untraceable fraud.

Additionally, the rise of scams and the use of technology, such as artificial intelligence, expands cyber criminals’ ability to exploit consumers and businesses.

The report comes as South African banks and financial services providers are increasingly being targeted by criminals, as website cloning scams proliferate as a method to steal consumers’ hard-earned cash.

A report by the South African Banking Risk Information Centre in October last year shows cyber criminals stole over R740 million from unsuspecting users through digital banking fraud.

It adds that incidents of fraud on banking apps saw a rise of 36%, with the number of cases increasing from 12 254 in 2021 to 16 638.

The LexisNexis study also reflects the evolution of criminal tactics. It reveals that more than half (52%) of businesses in EMEA identify the rise of synthetic identities as the primary challenge in customer identity verification.

Fraud remains a widespread problem for businesses, exerting pressure not only on financial resources but also impacting overall operational efficiency, customer trust and reputation, the firm states.

“It is self-evident that new forms of fraud increase the risk of financial losses for consumers and businesses,” says Jason Lane-Sellers, director, fraud and identity, EMEA at LexisNexis Risk Solutions.

“The issues facing businesses become even more challenging due to the fraud multiplier effect, where the losses experienced by organisations continue to increase and far exceed the lost face value in any transaction. Preventing fraud requires a multi-layered approach throughout the customer journey.”

Impact on customers

Among the other key findings, the report shows fraud significantly affects how customers perceive and interact with businesses.

Eighty-seven percent of South African respondents report that fraud has influenced customer satisfaction, compared to 75% across EMEA.

In South Africa, 93% notice its impact on customer conversion, higher than the 71% recorded in EMEA.

“These findings demonstrate SA has a particular sensitivity to customer experience. Any impact of fraud or fraud prevention techniques can affect customer satisfaction and lead to broader impacts on companies’ bottom line, so balancing prevention with appropriate customer experience controls is essential,” says LexisNexis.

Criminals constantly innovate, the study shows. “This dynamic nature of criminal behaviour means that fraud and its associated costs are not static threats that businesses can simply diminish. For instance, new payment methods provide fraudsters with opportunities to exploit vulnerabilities in the retail sector. Financial institutions are realising increasing trends in identity theft, scams and digital wallet fraud.”

LexisNexis believes that given the rising threat of fraud and cyber security risks, organisations should embrace forward-thinking fraud management and authentication solutions.

“This involves leveraging the capabilities of technologies such as AI, machine learning, and biometric and behaviour-based authentication methods,” it concludes.