Javelin Strategy & Research: Small Business Owner Alert—The Impact of Online Security Breaches and the High Cost of Fraud

How Banks and Vendors can Protect SMBOs from Identity Theft and Fraud

SAN FRANCISCO--(BUSINESS WIRE)--A new Javelin Strategy & Research report issued today —“2011 Small Business Owners (SMBO) Identity Fraud Report: How SMBO Fraud Rates Impact FI Revenues and Retention” describes the higher rates of fraud faced by small business owners (SMBOs) today, including unique online security challenges. By sharing effective anti-fraud solutions with SMBOs, FIs and credit card issuers can also create revenue opportunities and reduce client churn. The report outlines the steps SMBOs can take in partnership with financial institutions (FIs) and credit card issuers to combat and prevent online fraud.

“SMBOs face significant financial losses as well as other issues as a result of fraud”

SMBOs are an attractive target for fraudsters because they conduct a myriad of transactions that often span both business and personal accounts. As small businesses, they are vulnerable in areas that fraudsters can exploit, namely, the lack of a dedicated IT staff to monitor and protect online operations and less formalized processes around security practices and credit card transactions. This creates opportunities for security breaches and risks for inadvertently releasing personal data.

The Javelin report outlines how SMBOs may also be affected by the recent Epsilon and State of Texas security breaches that exposed such personal data as names, email addresses, mailing addresses, dates of birth, social security numbers, driver license numbers, and – in some cases – awards points balances and other information. The release of such information and newer and more sophisticated attacks, such as phishing and spear-phishing where fraudsters use personalized data to commit identity fraud, will continue to pose threats to SMBOs, who do not necessarily have the resources in place to combat these threats.

Javelin discovered that SMBO fraud totaled an astonishing $8 billion in 2010. Banks, merchants and other providers absorbed at least $5.43 billion of that loss, while the cost to victims was $2.61 billion. Javelin also found that SMBOs sustain greater losses than their online consumer counterparts. The estimated fraud rate for SMBOs is significantly higher than that for the general consumer population. The average SMBO victim cost of fraud is more than double the consumer victim cost of $631.

“SMBOs face significant financial losses as well as other issues as a result of fraud,” said Philip Blank, Senior Analyst, Risk, Fraud, and Security at Javelin. “SMBOs have higher legal costs and longer timeframes for resolution of fraud than consumers. Also, SMBOs do not have the same zero liability fraud guarantees that online banking consumers receive from their FIs.”

SMBOs are not the only ones affected by online security breaches. Their partners – FIs and credit card issuers – not only absorb billions of dollars of financial losses, but also lose SMBOs as clients. Javelin research shows that more than 1 in 5 of SMBO fraud victims switched credit card issuers and nearly the same proportion switched banks as a direct result of fraud. These changes create a significant amount of churn and lost revenues for FIs and issuers, as SMBOs tend to have a higher transaction rate than the general consumer and often generate significantly more fees and charges for the FI or issuer.

“FIs and issuers have a vested interest in maintaining their client relationships with SMBOs,” said James Van Dyke, President and Founder of Javelin. “Toward that end, Javelin recommends that FIs and issuers partner with SMBOs to reduce and stop fraud. FIs and issuers can offer more real-time and comprehensive alerts for SMBO credit, debit and demand deposit accounts (DDA), as well as fraud avoidance software, identity theft protection, and credit monitoring services. Selling anti-fraud and security services not only helps SMBOs prevent fraud, but also generates revenue for the FIs and issuers.”

The 2011 Small Business Owners (SMBO) Identity Fraud Report, based on data collected through standardized telephone interviews by Javelin in November 2010 from a random sample panel of 5,004 consumers and data from previous annual identity fraud surveys, reviews the costs of online fraud and its impact on SMBOs, FIs, and issuers, and proposes strategies SMBOs can use and the tools FIs and issuers can provide to protect SMBOs from the next wave of online security attacks.

Selected Key Report Findings – 2011 Small Business Owners (SMBO) Identity Fraud Report

• The online security challenges facing small business owners and the ways in which small businesses – unknowingly – put themselves at risk.
• The real costs of fraud to small business owners – and FIs and issuers.
• The most common types of identity fraud for small businesses and the number one item lost during data breaches.
• The steps small business owners can take to protect themselves and their businesses from online fraud.
• How FIs and issuers can partner with SMBOs to prevent fraud – and create revenue opportunities.

Contact

For more information about this or other Javelin reports, please contact Crystal Mendoza at [phone] ext. 35 or [e-mail] or visit www.javelinstrategy.com/research.

To arrange an interview with a research analyst and/or view available research (available to qualified members of the media), please contact Crystal Mendoza at [phone] ext. 35 or [e-mail].

About Javelin Strategy & Research

Javelin Strategy & Research is the leading provider of quantitative and qualitative research focused on the global financial services industry. Our extensive quantitative data and deep analyst experience enable us to forecast the direction of the financial services market and make recommendations that empower you and your business to succeed.

Javelin provides superior direction on key facts and forces that materially determine the success of customer-facing financial services, payments and security initiatives. Our advantages are rigorous process, independent position and expert people.