The percentage of online revenue lost to fraud in 2007 held steady with 2006 at 1.4 percent. But as ecommerce grows, the total dollar loss from online payment fraud is growing at the rate of about 20 percent a year, and is estimated at $3.6 billion in 2007, up from $3.1 billion in 2006, according to CyberSource Corp.'s 2008 Online Fraud Report.
The percentage of orders accepted by online merchants that were later determined to be fraudulent was 1.3 percent in 2007, compared with 1.1 percent in 2006. Incoming orders rejected by merchants because of suspicion of fraudulent activity also was up slightly, reaching 4.2 percent in 2007.
The report noted that some merchants of similar size, selling similar products online, maintain order rejection rates significantly below four percent, while also maintaining low fraud rates. So web merchants with order rejection rates of 4.2 percent or more are rejecting a significant number of valid orders, the survey report concluded.
Manual order review rates were 27 percent of all orders in 2007, up from 23 percent in 2006. Overall, more than 82 percent of merchants engage in manual order review, averaging one out of every three orders.
Larger online merchants, defined as those with $25 million or more in annual sales, tend to employ more automated order review, and had a slight drop in their manual order review rate, from 15 to 14 percent. However, that drop did not offset their growth in online order volume, meaning that they likely reviewed the same or a greater number of orders in 2007 as in 2006, according to CyberSource, which is an electronic payment service vendor.
The survey also determined that merchants found the rate of fraud associated with international orders to be more than two and a half times as high as domestic orders. Chargebacks, the most often cited metric for online payment fraud, account for almost half of fraud losses. But merchants that confine efforts to combat fraud loss to a focus on managing chargebacks are not seeing the whole financial picture, CyberSource said.
Payment fraud affects profits from web sales in multiple ways, in addition to direct revenue loss. They include the cost of stolen goods, the cost of rejecting valid orders, cost of staffing manual order reviews and the limits manual review places on scalability. "Profit leaks" from those areas affect 47 percent or more of all orders for medium sized online merchants, and 19 percent or more for large merchants, the report said.
"While the fraud rate is one metric to monitor and contain within industry and association limits, an end to end view is required to arrive at the best possible outcome," according to CyberSource.
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