Merchants lose billions to fraud every year, but theft estimates are often underestimated. That’s because, as a report released Wednesday pointed out, the actual cost of fraud can be much higher.
According to the 2025 LexisNexis True Cost of Fraud Study, U.S. merchants incur an average cost of US$4.61 for every $1 of fraud, while in Canada, costs are $4.52 per $1.
Based on a survey of 569 risk and fraud executives in retail and e-commerce companies in the U.S. (487) and Canada (82), the study shows that fraud’s impact goes beyond direct financial losses and encompasses operational, reputational, and compliance costs.
The study noted that indirect losses have steadily increased since 2016, when costs were $2.40 per $1, underscoring the growing complexity and expense of combating fraud.
“Fraud has gone up by 32% from 2022 to now,” LexisNexis Risk Solutions Senior Director for Fraud and Identity Maanas Godugunur told the E-Commerce Times. “We expected an incremental rise, but a 32% rise is definitely cause for caution.”
According to the study, fraud costs vary by channel. In both U.S. and Canadian e-commerce, online transactions account for the largest share of fraud costs, with more than half the burden in these markets. Mobile transactions also contribute significantly to fraud costs, with U.S. e-commerce seeing a combined 30% share and Canadian e-commerce reporting 37%.
The study also found that mobile payments continue to be a rising fraud target for digital bandits. In U.S. retail, QR code fraud contributed to 19% of indirect fraud costs, digital wallets contributed 12%, and peer-to-peer transactions 11%. On the e-commerce side, QR codes contributed 20%, digital wallets 15%, and peer-to-peer transactions 6%.
In Canadian retail, QR codes contributed 26% to fraud costs, digital wallets 12%, and peer-to-peer transactions 5%, while in e-commerce, QR codes contributed 25%, digital wallets 16%, and peer-to-peer transactions 7%.
Balancing Friction in Fraud Prevention
One trend in this year’s study that surprised Godugunur was how heavily organizations lean on manual operations for fraud monitoring and mitigation strategies. “The manual approach seems to be something they are adopting at a very high scale,” he said.
What was also surprising was how confident the organizations were in the effectiveness of those manual systems, he added. “If you are going with a manual approach against the generative AI capabilities of fraudsters, I feel it’s very optimistic of merchants to feel like they have very good fraud operations and fraud strategies in place,” he said.
The survey also noted that managing customer friction plays a key role in preventing fraud. Businesses must ensure security while maintaining speed and ease of use to maintain a positive user experience, it advised. Overly strict fraud prevention can frustrate customers and cause them to abandon transactions or close accounts.
In the U.S., it continued, poor user experience (36% retail, 37% e-commerce) is the primary driver of abandonment at new account creation, showing how fraud controls can unintentionally lead to drop-off.
“Effective fraud prevention is about leveraging user identity intelligence to provide a seamless experience for legitimate customers while adding additional barriers for suspicious activity,” explained Alexander Hall, a trust and safety architect with Sift, a company specializing in AI-powered fraud prevention and digital trust solutions, in San Francisco.
“The key to achieving this balance is control, flexibility, and overall accuracy,” he told the E-Commerce Times.
“Some fraud-prevention systems operate essentially as a ‘black box,’ giving little to no insights into their decisioning and offering limited customization,” he continued. “Leaving these types of systems to freely make transaction decisions can quickly lead to direct financial losses and customer churn, lost LTV and soured brand reputation — and interfering with the quality of customer experiences and a business’s bottom line.”
“In 2023, the speed and scale achieved by threat actors online cost businesses an estimated $48 billion, with companies globally dedicating an average of 10% of their revenue solely to fraud operations,” Hall added. “But by applying friction dynamically, merchants regain control over fraud operations and allow legitimate customers to sail through login, payment, and the full user journey.”
Fraud Risk in Identity Verification Gaps
The study also warned that gaps in identity verification can weaken fraud prevention. Merchants struggle with onboarding processes, while ineffective authentication and fraud detection make it harder to counter evolving threats.
Fraudsters target these vulnerabilities, with up to 41% of U.S. businesses identifying identity verification as a significant challenge at new account creation, higher than for purchase transactions (36%) and account logins (37%).
“Many ID verification processes in the U.S. still rely heavily — if not exclusively — on data that has long since been compromised in data breaches,” explained James E. Lee, chief operating officer of the Identity Theft Resource Center, a nonprofit organization devoted to minimizing risk and mitigating the impact of identity compromise and crime, in San Diego.
“This is true at the time of account set-up and re-verification during the life of an account,” he told the E-Commerce Times. “Stolen SSNs, driver’s licenses, and other forms of personal information are so readily available that it’s easy to impersonate most any adult in the U.S. Layer in artificial intelligence, and it’s difficult for even the most sophisticated anti-fraud tools to suss out real from the fake identities.”
Suni Shamapande, a principal with PwC, an international professional services company, maintained that customer identity verification is the crucial initial filter in fraud prevention.
“Successfully verifying a known customer allows for expedited processing based on their established history,” he told the E-Commerce Times. “However, challenges such as account takeover and identity fraud are prevalent, making it essential to ensure that customers are indeed who they claim to be.”
“Many retailers face difficulties with this vital first step, as accurately confirming a customer’s identity is often more complex than it appears.”
How Customer Perks Invite Fraud Risks
Retail fraud is rising because the barriers to committing it are lower than ever — and the incentives are high, contended Claire Mauer, senior product marketing manager at Seon, an international fraud prevention and anti-money laundering compliance company.
“The combination of lenient return policies, anonymous payment methods, and growing reliance on digital channels has created a perfect storm,” she told the E-Commerce Times.
“Fraudsters don’t need to breach systems. They just need to manipulate them. From refund abuse to synthetic identities, fraud is increasingly first-party and subtle — harder to detect with traditional tools. And as customer experience remains king, businesses often hesitate to tighten processes, inadvertently inviting more risk,” she explained.
“What makes this problem particularly insidious is the advanced technological tools now available to fraudsters,” added Eido Gal, chairman, CEO, and co-founder of Riskified, a provider of fraud prevention and chargeback protection solutions for e-commerce businesses, headquartered in New York City.
“Generosity is a double-edged sword in e-commerce — what makes for a great customer experience also provides opportunities for fraudsters,” he told the E-Commerce Times. “Factors like the dark web and malicious AI tools have turned return fraud into a highly efficient operation. Fraudsters exchange strategies and adjust in real time, making it incredibly challenging for retailers to stay ahead.”
“It’s easy to dismiss this as a retailer problem, but the truth is, everyone bears the cost,” he said. “Fraudsters steal more than products — they siphon away resources that could improve customer experiences.”
