E-commerce fraud losses climb

Fraudsters will make away with US$700 million more in e-commerce revenue this year than last, according to new research.

CyberSource, in the sixth installment of its annual fraud survey, found businesses will lose US$2.6 billion to online fraud in 2004 -- a 37 percent increase over 2003 figures.

In addition, the cost of managing fraud jumped, says CyberSource, which specializes in electronic payment and risk management services for retailers. Merchants are rejecting 28 percent more orders because of suspicion of fraud, and manually reviewing 17 percent more orders, the vendor says.

On the positive side, retailers have had some success limiting fraud loss. This year fraudulent orders account for 1.8 percent of online sales, which is statistically level with last year's 1.7 percent, CyberSource says. The US$700 million swing in fraud losses is due to growth in e-commerce revenue: The 348 merchants surveyed expect their e-commerce revenue to increase by 39 percent in 2005.

Small and midsize businesses with US$500,000 to US$5 million in online revenue have taken the hardest hit, according to CyberSource. This group will lose up to 2.5 percent of its online revenue to fraud, compared to 1.9 percent last year.

Meanwhile, companies with online revenue between US$5 million and US$25 million will see a loss rate of 1.5 percent (same as last year), and those with US$25 million-plus revenue anticipate losses of 1.1 percent (down slightly from last year's 1.3 percent loss rate).

International e-commerce orders continue to spell more trouble for retailers, with order rejection and fraud rates up to three times higher than domestic orders. Merchants that accept orders from outside North America reject over 13 percent of orders on suspicion of fraud, CyberSource says. Among orders accepted, 3.8 percent turn out to be fraudulent -- which is nearly 3 times higher than the overall rate.

"Businesses are telling us they're seeing more sophisticated fraud attempts," said Doug Schwegman, director of market intelligence at CyberSource. "Though many are succeeding in containing fraudulent order rates, the strain is showing in their rejection and review rates and their need for more tools."

Indeed, a big impact of e-commerce fraud is the loss of potential revenue to merchants when suspicious -- but not necessarily fraudulent -- orders are rejected. According to the survey, merchants rejected nearly 6 percent of orders in 2004, up from 4.6 percent in 2003. This means for every confirmed fraudulent order, merchants are refusing another 4 or 5 orders on suspicion of fraud, CyberSource says. If a portion of these orders are valid, that's money left on the table.

Also eating into merchant profits is a reliance on manual order reviews. According to CyberSource, 73 percent of merchants manually check orders today, a 12 percent increase over last year. In addition, the number of orders being manually reviewed rose to 27 percent of all orders, up from 23 percent in 2003.

On the flip side, however, more merchants are turning to automated fraud tools for help. In addition to manual review, 82 percent of merchants use address verification services, 56 percent use card verification number checking, and 53 percent use internally-built fraud screens.

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