On Guard Against Online Fraud

E-commerce is growing at around 20 percent annually – and online fraud is growing right alongside it, reaching an estimated $3.6 billion in lost revenues in 2007, according to the latest Online Fraud Report from CyberSource. Dollar losses involving e-commerce payment fraud continue to trend up, even as the rate of online revenue loss has declined from 1.8 percent in 2004 to 1.4 percent each of the last two years.

Among other findings from the survey of more than 300 online merchants:
• Chargebacks understate fraud loss by as much as 50 percent.
• Fraud associated with international orders is more than 2.5 times greater than with domestic orders.
• Accepted orders later determined to be fraudulent increased slightly, from 1.1 to 1.3 percent.
• The overall order rejection rate due to suspicion of fraud also increased slightly, from 4.1 to 4.2 percent.

The increase in online volume may help top-line sales figures, but it also increases the challenges of screening more orders. The CyberSource Online Fraud Report found that 82 percent of e-commerce merchants still rely on manual review of orders and, on average, are reviewing one in three orders.

Leaks in the pipeline
In encouraging retailers to maintain a “total pipeline view,” the survey notes that “businesses that focus solely on managing chargebacks may not be seeing the complete financial picture” because online payment fraud impacts profits from online sales in several ways. These include direct revenue losses, plus the cost of the stolen goods or services, and any associated fulfillment or delivery expenses. There are also the additional costs of rejecting valid orders, staffing manual review, administration of fraud claims and, in the end, the challenges associated with business scalability.

Profit leaks in the risk management pipeline impact as much as 46 percent of orders for medium-sized merchants and 19 percent for larger retailers, the survey found.

More than three-quarters of the respondents reported using three or more fraud detection tools, with 5.4 tools being the average (up from 4.8 in 2006). The largest merchants averaged seven fraud detection tools. The tool most frequently employed is the address verification service, which compares numeric address data with information from the card-issuing bank.

Card verification number, which goes by various acronyms in card-issuer parlance, is the next-most popular fraud detection tool, used by 74 percent of the merchants. Company-specific fraud screens are the third-most frequently used tool – but are cited by users as being the most effective weapon in their anti-fraud arsenals.