February 28, 2006, 12:00 AM

Online retail`s new dilemma: Fight fraud or not

Given rapid growth in online order volume, particularly at larger e-retailers, and the burden it will place on fraud programs, it may just be better for the bottom line to let some fraudulent orders go through. That’s a finding from CyberSource Corp.’s Seventh Annual Online Fraud Report.

The ideal-if not the actual goal-of fraud management programs for online retailers is to shrink chargebacks on fraudulent orders to zero, right? Maybe. Given rapid growth in online order volume, particularly at larger e-retailers, and the burden it will place on fraud programs, it may just be better for the bottom line to let some of the fraudulent orders go through.

That’s a finding from CyberSource Corp.’s Seventh Annual Online Fraud Report, which notes that with e-commerce growing at 20% or more per year, larger merchants will be faced with screening more and more online orders, representing a major challenge to the extent that review processes involve manual review. Only 24% of the 404 online merchants surveyed say they have budgeted to boost manual review staff this year to support higher order volume. The survey report estimates that just to keep up with increased demand on order review, large merchants would have to increase fraud management efficiency by about 20%, maybe more, given that such programs may already be operating at levels that are sub-optimal.

Rather than pursuing the eradication of chargebacks on all fraudulent orders at all costs, a larger view may be the more profitable approach, suggests the survey report, which urges large online retailers to take “a total pipeline view of operations and costs” and notes that the fraud rate is just one metric to monitor. Online payment fraud’s cost to a merchant can’t be reckoned solely in terms of the loss of stolen goods, says CyberSource. The tab also includes related costs such as fraud claims administration and challenges associated with business scalability.

To maximize efficiency, the report argues, online merchants should move beyond a sole focus on managing chargebacks to plug “profit leaks” throughout risk management operations; for instance, scrutinizing manual review in terms of staffing and scalability demands and looking at sales lost as the result of order acceptance and rejection policies.

Some already are doing just that-and making the decision to let some of what they might have rejected in the past go through. CyberSource notes that medium-sized and large online retailers appear to be coming out slightly ahead by accepting a slightly higher number of fraudulent orders. Such merchants, according to the survey report, may be “examining the trade-off between valid order rejection and fraud acceptance, and making a bottom-line ‘net profit’ decision in the face of operational realities.”

Whatever route retailers may choose, the online fraud rate has been relatively stable the last three years: 1.6% of sales in 2005, 1.8% in 2004 and 1.7% in 2003. Because of rising sales, dollars lost rose to $2.8 billion from $2.6 billion, CyberSource reports. International orders carried risk two to three times that of domestic orders, CyberSource reports.

 

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