July 13, 2006, 12:00 AM

Customized security rules lead e-retailers’ fraud-prevention techniques

The most effective means of preventing online fraud among e-retailers is setting customized rules—such as subjecting all orders over $100 or from certain countries to extra scrutiny—according to a recent study by the Merchant Risk Council.

Paul Demery

Managing Editor, B2B E-commerce

The most effective means of preventing online fraud among e-retailers is setting customized rules-such as subjecting all orders over $100 or from certain countries to extra scrutiny-according to the Merchant Risk Council’s Fifth Annual Survey of risk management at online retailers.

Customized rules, cited by 50% of respondents as the most effective tool for fighting online fraud, up from 41% in 2001, was followed by customer follow-ups (41%), post-process fraud management (39%), maintaining negative files (36%) and using real-time credit card authorizations (34%).

The study also found that some fraud-prevention procedures that were considered effective a few years ago have since lost favor among retailers. Address verification systems were cited as most effective by 25% of retailers, down from 69% in 2001, as credit card verification codes fell to 31% from 49% and fraud scoring dropped to 27% from 38%.

When asked how much they spent on fraud prevention as a percent of card-not-present revenue, the largest group of respondents, 28%, said they spent .05%. Among others, 22% said they spent 0.1% of card-not-present revenue on fraud prevention and 17% said they spent 0%.

35% of respondents said they reviewed more than 20% of orders for fraud prevention; 27% said they reviewed less than 5%; 10% said they reviewed none. The others ranged from 5-20% of orders reviewed.

Of those retailers that reviewed more than 20% of orders for fraud prevention, 30% said they had a chargeback rate of less than 0.5% and 4% said they had chargeback rate of over 0.5%.

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