March 16, 2006, 12:00 AM

How Newegg keeps its online fraud rate at under 1%

While growing to over $1 billion over its first five years, Newegg has learned how to maintain an online fraud rate for orders of 0.08% or less, vice president Howard Tong says.

 

While growing to over $1 billion over its first five years, Newegg has learned how to maintain an online fraud rate for orders of 0.08% or less, vice president Howard Tong tells InternetRetailer.com.

The average rate of online payment fraud as a percentage of orders is about 1% or more, according to CyberSource Corp., a provider of credit card processing and risk management software and services. At Newegg, the retailer has kept its fraud rate under 1% by expanding its fraud prevention staff, working with payment processors on risk management techniques and constantly tweaking its own software and manual processes for checking order transaction data, Tong says.

“When we started in 2001 as a pureplay online retailer, without the ability to check customer signatures or IDs in person, we were forced to develop in-house a lot of the methodology we use today,” Tong says.

Tong will speak at the Internet Retailer 2006 Conference in June in Chicago on the topic, From Zero to a Billion in Four Years. Newegg is No. 9 in the Internet Retailer Top 400 Guide to Retail Web Sites.

If a customer with an average order value of $100 suddenly places an order for $2,000, Newegg’s in-house software will alert the fraud prevention staff for a possible manual review and personal contact with the customer, says fraud prevention manager J.D. Sisk.

But to accommodate its rapid growth, Newegg has expanded its fraud prevention staff to conduct more manual reviews where necessary, he adds. About two years ago, when its fraud rate was about 0.12%, Newegg’s fraud prevention staff consisted of three or four agents who doubled as customer service reps. Since then, it has built its fraud prevention staff to 20 full-time people dedicated to security issues.

Effective fraud prevention requires a coordinated mix of technology and staff, Sisk adds. “Every day we generate reports on fraud patterns and forward them to our staff of investigators,” he says.

But keeping the fraud rate down also requires cooperation with third-party providers. Newegg follows several fraud-prevention steps outlined by Visa, MasterCard and I4 Commerce Inc.’s Bill Me Later invoicing product. For example, he says, a Bill Me Later customer cannot go online and change a ship-to address after having placed the order, Tong says. “If a customer contacts us and asks to change that address, we ask them to work through Bill Me Later or redo their order.”

 

 

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