E-Commerce Fraud Leads To Lost Customers

Stung by financial fraud, U.S. adults are reacting to losses by ending relationships with banks and curtailing the use of online e-commerce services.

Roughly 7.5% of U.S. adults lost money as a result of financial fraud in 2008, largely because of data breaches, according to a Gartner study released Wednesday.

There were 656 data breaches reported in 2008, a 47% increase from 2007, based on statistics compiled by the Identity Theft Resource Center.

Gartner's research, based on data gathered from about 5,000 people, shows that data breaches were the leading source of financial fraud against consumers and were the source of much of the payment card fraud, the most common fraud type.

In 21% of cases, the source of the fraud was not known. In 19% of them, the source was a data breach. In 16% of them, the source was a stolen wallet or purse. In 13% of them, the source was a phishing attack or some other scam not related to auctions, which as a distinct category accounted for 9%.

The study found that compared with the average consumer, victims of financial fraud were twice as likely to change their shopping, payment, and e-commerce behavior. "Among all consumers, 39% changed their behavior because of security concerns," the study states. "Among fraud victims, 71% of them changed their behavior because of security concerns."

Consumers can be expected to have some reaction to being defrauded, but Gartner VP Avivah Litan found the extent of the reaction surprising. "It was much more extreme than I had thought," she said.

Such behavior is even more pronounced among victims of electronic checking or savings account transfer fraud. Consumers affected by such fraud were five times more likely to change banks because of security concerns than unaffected customers.

"If you've had your checking account raided ... that just spooks customers away," said Litan. That's because people lose money and don't get it all back, she explained, noting that the average recovery rate for lost funds was something like 50%.

This suggests that money invested by organizations in security has a significant impact on customer retention. Gartner recommends that organizations act to protect sensitive data before it's too late.

Security, Litan said, has meaningful marketing value for organizations that actually secure their systems. She points to the success PayPal has had promoting its security.

Beyond that, Litan stresses that it's not enough just to lock data down. Companies also have to help consumers deal with fraud through remediation assistance, she said.

Looking ahead, Litan sees social networks becoming a significant source of fraud because they're such a rich source of personal information. "I would recommend you get off them right away," she said. "Maybe I'm just too paranoid because I know too much about this."

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