Fraudsters Siphon $3 Billion from eBiz

Results of the eighth annual CyberSource Corporation survey of e-commerce fraud, released yesterday, shows that U.S. merchants will lose as much as $3 billion in revenue to fraud in 2006, up from $2.8 billion the year before. The good news: As a percent of revenue, fraud losses will be slightly less this year — merchants expect to lose 1.4 percent of revenue, down from 1.6 percent last year.

The findings support a long-term downward trend. In 2005, the reported fraud rate was 1.6 percent, and in 2004 it was 1.8 percent. Because e-commerce is growing so rapidly, even a declining percent of revenue continues to yield higher dollar losses.

The survey, sponsored by CyberSource Corporation and conducted by Mindwave Research, was completed from Sept. 14 to Oct. 6, and though it yielded just 351 qualified responses, the take-aways provide a telling snap-shot of the industry's efforts to thwart deadbeats. Here are the highlights of the report:

Order Rejection Errors Add to the Challenge
Overall, merchants say 1.1 percent of accepted orders later turn out to be fraudulent. This number has been relatively steady for the last three years (1 percent in 2005, 1.3 percent in 2004). But merchants also say they are rejecting 4 percent of because they suspect fraud. Even if only 1 out of 5 of those prove to be valid, merchants will have turned away another $1.6 billion in sales — likely losing them to a competitor.

Chargebacks Only Part of the Picture
CyberSource has historically asked merchants to estimate the percent of orders they accept that later turn out to be fraudulent, including those orders charged back through the banking system as well as any direct credits or reversals they issue. According to merchants in 2006, fraud chargebacks only represented 35 percent of the fraud they experienced, while 65 percent were handled at the merchant level through reversals or credits to the consumer.

International Orders Pose Risks
E-tailers are responding to the opportunity represented by international e-commerce — 61 percent of merchants accept orders from outside the U.S. and Canada, and those orders represent 17 percent of their total order volume. But this business carries greater fraud risk. Survey respondents said that in 2006, 2.7 percent of international orders were fraudulent, a rate 2.5 times higher than the rate associated with U.S. and Canadian orders at 1.1 percent. Web shop owners reject 12.7 percent of international orders, consistent with last year's findings, a rate nearly three times that of orders originating in the U.S. or Canada.

Reviews: Making A List, Checking It Twice
In response to fraud risk, more merchants than ever before are reviewing some orders manually. Eighty-one percent of merchants in the sample now conduct manual reviews, compared to 73 percent last year. While the practice of manual review has increased, the rate of review may have peaked in 2005. On average, merchants who perform manual reviews are checking 28 percent of their orders, a 20 percent change from 35 percent in 2005. Larger merchants perform better than the average, citing review of one in seven orders.

More Automation in Anti-Fraud Efforts
In response to growing fraud losses and ever increasing e-commerce volume, online sellers are turning to tools and systems that will automate and streamline fraud-management. Overall, the use of anti-fraud tools grew 14 percent from 4.2 to 4.8 tools used per merchant. The largest bussineses, those selling more than $100 million online annually, average nearly eight tools.

Almost every tool the survey addressed showed an increase in use (where comparative data is available). Those showing the greatest increase include positive lists (10 point increase to 21 percent), order velocity monitoring (10 point increase to 33 percent), IP geolocation (10 point increase to 35 percent) and company-specific fraud screens (10 point increase to 38 percent).

Positive lists are "known good" customers; order velocity monitoring assesses purchases over time by product, total dollar amount, frequency, product mix and similar measures; IP geolocation tests evaluate the risk of an e-commerce transaction based on the "electronic address" of the purchaser as compared to other geographic data supplied with the order.

Finally, the report showed that use of decision systems, systems that apply merchant-established business rules to inbound orders as they screen transactions for fraud, increased by 30 percent.

Michelle Megna is managing editor of ECommerce-Guide.com.

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