August 25, 2011, 11:00 AM

Fraud rates increase for 24% of web retailers over the past year

An Internet Retailer survey shows a drop in fraud for 13% of web merchants.

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Fraud rates for online transactions have increased over the past year for 24.3% of the 112 respondents to Internet Retailer’s new survey about online payment trends. Meanwhile, fraud rates have decreased for 12.6% of respondents, and stayed the same for 63.1%.

68.8% of the responses came from web-only merchants, with the rest from chain retailers, catalogers and consumer brand manufacturers. 50% of respondents have annual web sales of less than $1 million, with 22.3% taking in between $1 million and $5 million per year; nearly 10% of respondents said their annual web sales exceed $50 million.

To guard against fraud many retailers manually review certain transactions that appear suspicious because they come from areas or IP addresses known for high rates of online fraud, or have other suspicious characteristics. 43.6% of the respondents to the survey said they manually review more than 20% of transactions. 9.1% manually review 16% to 20% of transactions; 6.4% review 11% to 15% of transactions; 10.9% review 6% to 10% of transactions; and 30.0% review no more than 5% of transactions.

The survey respondents also reported their fraud rate for online sales; the first figure is the fraud rate, followed by the percentage of respondents:

• Less than 1%: 67.0%

• 1% to 2%: 19.3%

• 2% to 3%: 6.4%

• 3% to 5%: 5.5%

• 5% to 10%: 0.9%

• More than 10%: 0.9%

“Retailers must continue to find ways to promote a secure online experience as well as protect consumers’ information during and after a transaction is processed,” says Souheil Badran, senior vice president and general manager at Digital River World Payments, the payment services arm of e-commerce services provider Digital River Inc. “Retailers are migrating towards hosted payment pages that will help them avoid handling identifiable consumer information.  A growing trend is the movement towards token-based technology to conceal sensitive account information.”

Tokenization is a technology that changes consumers’ payment card information into randomized codes so that even if criminals steal the data they can’t use it to commit fraud.

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