Fraudsters Filch $4B Online in 2008

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<p><strong>Mountain View, Calif. &mdash; Dec. 10 </strong><br />Results of the 10th annual CyberSource Corp. survey of e-commerce fraud show merchants expect to lose a record $4 billion to online fraud in 2008. Merchants say the fraud loss rate will hold constant at 1.4 percent of revenue (same as 2007 and 2006), but continuing growth in e-commerce sales mean dollar losses to fraud are still growing. Merchants are shifting some fraud fighting priorities, perhaps as an adjustment to a slowing economy.<br /><br />”For years, U.S. e-commerce merchants have fought fraudsters to what amounts to an annual standoff,” said Doug Schwegman, CyberSource director of market and customer intelligence. </p><p>”Losing on average about 1.4 percent of sales to fraud has been the constant. This year, however, for the first time, merchants could not rely on double-digit market expansion to bolster online revenue growth or to cover inefficiencies. In two key areas &mdash; lower order rejection rate and higher interest in automated tools &mdash; merchants seem to be managing more aggressively in a challenging economy.”<br /><br />Order rejection rates due to suspicion of fraud, which have been consistent for several years at around 4 percent of incoming orders, showed a significant drop in 2008, falling from last year&#39;s 4.2 percent, to 2.9 percent. Put more simply, merchants are accepting a higher percentage of the orders they receive. This trend was seen across all types and sizes of merchant. Falling rejection rates coupled with steady fraud rates imply that merchants are more successful this year than in previous years at fighting fraud.<br /><br />On automated fraud detection tools, evidence of increasing interest is equally compelling. This year&#39;s survey asked merchants about their plans to implement 14 tools that had also been studied in 2007. In every case the intent to implement increased, in some cases by as much as two to three times. </p><p>These fraud detection tools can provide an automated assessment of the fraud potential of a transaction and can reduce reliance on human involvement. Eighty-seven percent of merchants do not expect to add review staff in 2009, representing the most conservative staffing posture we have seen in the survey.<br /><br /><strong>Fraud Rates Plateau</strong><br />For the third consecutive year, e-commerce merchants said, on average, they will lose 1.4 percent of their online revenues to fraud. Their fraud rate on accepted orders averaged 1.1 percent in the U.S. and Canada. The survey tracks results by type of merchant, with the consumer electronics category showing the highest fraud rate for the year among eight industry segments measured &mdash; 2 percent of accepted orders, nearly double the average.<br /><br />Once again, merchants reported that only about half of their fraud is reported via chargeback (bank card holders disputing a charge with the issuing bank), with the remainder coming directly through their customer support functions.<br /><br /><strong>Midsize Merchants Most Challenged</strong><br />While overall averages have remained relatively flat, a consistent trend in the market has emerged. Merchants with online revenues of $5 million to $25 million are most challenged by online fraud. When compared with larger merchants (online sales of $25 million-plus), the midsize e-commerce merchants show higher order rejection rates (4.3 vs. 2.4 percent), higher manual review rates (34 vs. 15 percent of orders) and higher fraud loss rates (1.6 vs. 1.2 percent of revenue). <br /><br />According to Schwegman, “We believe the largest merchants are simply better at fighting fraud; they make better use of fraud detection tools and other resources. And as they work through the growing pains of becoming a large merchant, mid-sized merchants&#39; fraud metrics may actually spike if they haven&#39;t implemented the tools and established the review expertise to sufficiently protect them from the increase in the volume of fraudulent activity.”<br /><br /><strong>International Order Risk Remains High</strong><br />This year, 52 percent of merchants say they accept orders from beyond the borders of U.S. and Canada, and those merchants say international orders constitute an average of 17 percent of their total orders in 2008. This growing market opportunity does bring more than its share of risk, however. Merchants say fraud on international orders was 3.6 times higher than fraud on domestic orders. Since 2006, fraud on international orders has grown from 2.7 percent to the current 4 percent.<br /><br />Other key findings:<br /></p><ul><li>Though e-commerce sales are still increasing, 87 percent of merchants say they must fight fraud with the same or less staff in 2009. </li><li>Merchants showed a dramatically increased interest in more sophisticated automation tools. </li><li>For each of the past six years, approximately 1 out of 4 online orders have been manually reviewed.</li></ul><br />

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