January 18, 2011, 10:37 AM

Fraud losses fall

U.S. online retailers lost $2.7 billion to fraud in 2010, down from $3.3 billion.

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Fraud rates for online merchants in the United States and Canada remained steady at 0.9% in 2010 for the second straight year, says a report released today by CyberSource, a subsidiary of payment card network Visa. The fraud rate for online merchants in the United Kingdom, however, increased to 1.9% last year, up from 1.6% in 2009.

CyberSource defines the fraud rate as the percentage of accepted orders that later turn out to be fraudulent. The vendor bases its findings on 334 survey responses from North American online retailers and 200 responses from web merchants in the United Kingdom. The surveys were conducted in September and October.

Losses from online retail fraud in North America amounted to an estimated $2.7 billion in 2010, CyberSource says, down from $3.3 billion in 2009, another bit of good news for online retailers, who generally have enjoyed higher online sales during the holiday season. “E-commerce sales are picking up but fraud managers are keeping up with increased fraud volume,” says Doug Schwegman, director for worldwide market intelligence at CyberSource, which provides fraud prevention and payment processing services to online retailers.

Online merchants are becoming more aggressive about rejecting suspicious orders. North American Internet retailers rejected 2.7% of orders in 2010, up from 2.4% in 2009, the first increase in two years but still below the 4% rejection rate in 2008. U.K. online merchants rejected 5% of online orders last year, up from 4.6% in 2009. “When the U.K. fraud rates come down, I think you will see fewer orders rejected,” Schwegman says.

The payment processing and fraud prevention organization blamed the higher rate in the United Kingdom on such factors as criminals moving more of their activities to the country after facing stiff prevention methods elsewhere, and the tendency of U.K. web merchants to accept more cross-border e-commerce transactions, which are more likely to be fraudulent.

“The share of U.K. merchant revenue derived from international online orders is about 50% higher than that of North American merchants,” says Akif Khan, architect of the U.K. survey and director, products and services for CyberSource.  “And year after year, CyberSource surveys show the fraud rate associated with international orders is higher.  More generally, as e-commerce becomes more global, fraudsters can easily migrate from one location to the next.”   

North American merchants hope to beef up their automated systems for fraud detection and prevention, CyberSource says, with 53% of U.S. and Canadian respondents saying that improving automated detection is a top priority for 2011. 30% of U.K. respondents say the same thing. Few online merchants seem to have the resources to increase their fraud detection staffs in 2011, though. Only 13% of U.K. merchants and 16% of North American retailers say their 2011 budgets allow for hiring more employees to review potentially fraudulent transactions.        

Among the areas to watch for growth 2011 is so-called “friendly fraud,”  Schwegman says.  U.S. and Canadian respondents said they experienced more of that in 2010. CyberSource includes in this type of fraud a consumer trying to repudiate a transaction after items already have been delivered, and distinguishes it from fraud perpetrated by professional criminals. “Over half the merchants felt the prevalence of friendly fraud is increased,” he says, adding that persistently high unemployment is likely a factor in the increase.

Schwegman urges North American online retailers not to turn their backs on international e-commerce sales. “A lot of merchants avoid accepting international orders because they are riskier,” he says, “but that leaves room for competitors.”

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