Ecommerce fraud losses in the U.S. and Canada are expected to reach $4 billion for 2008, an 11 percent increase from 2007, according to CyberSource Corp.'s 10th annual survey of eCommerce fraud. However, the percentage of online revenue lost to fraud held steady with 2007 at 1.4 percent of total online sales.
Chargebacks, the most often cited metric for online payment fraud, continued to account for almost half of fraud losses, the report said. Merchants fight only about 50 percent of the fraud chargebacks they receive, with a third of merchants challenging less than 10 percent. But merchants that do challenge chargebacks recover, on average, 28 percent of their fraud chargebacks. The consumer electronics category showed the highest fraud rate at two percent. That is nearly double the average among the eight industry segments measured.
International orders continue to be highly risky, with merchants reporting that fraud on international orders was 3.6 times higher than on domestic orders, CyberSource said. Fraud on international orders has grown to four percent, up from 2.7 percent in 2006. In the most recent study, 52 percent of merchants say they accept orders from beyond the borders of the U.S. and Canada. International orders constituted an average 17 percent of those merchants' total orders in 2008.
Merchants with online revenue of $5 to $25 million faced the most fraud. When compared with merchants with online sales of more than $25 million, mid sized eCommerce merchants showed higher order rejection rates at 4.3 percent, versus 2.4 percent for smaller ones. They also have higher manual review rates, at 34 percent of orders vs. 15 percent, and higher fraud loss rates, at 1.6 percent of revenue versus 1.2 percent.
"We believe the largest merchants are simply better at fighting fraud. They make better use of fraud detection tools and other resources," said Doug Schwegman, director of market and consumer intelligence at CyberSource. "As they work through the growing pains of becoming a large merchant, mid sized merchants' fraud metrics may actually spike if they haven't implemented the tools and established the review expertise to sufficiently protect them from the increase in the volume of fraudulent activity," he warned.
The survey also found increased interest from merchants in automated fraud detection tools, by as much as two to three times in some cases, from 2007. However, merchants that manually review orders for fraud examined, on average, one out of every three orders, the same rate as in the four previous years. The annual survey from the electronic payment services vendor also found that order rejection rates tied to suspicion of fraud showed a significant drop, to 2.9 percent of incoming orders, down from 4.2 percent in 2007. On average, 1.1 percent of accepted orders were fraudulent, CyberSource said.
Merchants have made little progress in minimizing the time spent manually examining good orders, according to the CyberSource study. Merchants in 2008 accepted an average of 73 percent of orders they manually reviewed, roughly the same percentage as the year before. About half of merchants accepted 90 percent or more of the orders they reviewed. "If you're a merchant and you're accepting this level of reviewed orders, there is a real opportunity for you to reduce costs and profits simply through better initial automated order screening," Schwegman said. The survey was based on the responses of 400 online merchants in the U.S. and Canada.
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