E-commerce fraud losses in the U.S. and Canada are expected to reach $4 billion this year, an 11% increase from $3.6 billion in 2007, according to CyberSource Corp.’s 10th annual survey of e-commerce fraud, which was released today. However, the percentage of online revenue lost to fraud held steady with 2007 at 1.4% of online sales.
Chargebacks, the most often cited metric for online payment fraud, continued to account for almost half of fraud losses, the report says. Merchants fight only about 50% of the fraud chargebacks they receive, with a third of merchants challenging less than 10%. But merchants that do challenge chargebacks recover, on average, 28% of their fraud chargebacks.
The consumer electronics category showed the highest fraud rate at 2%, nearly double the average among the eight industry segments measured.
International orders continue to be highly risky, with merchants reporting that fraud on international orders was 3.6 times higher than on domestic orders, CyberSource says. Fraud on international orders has grown to 4% from 2.7% in 2006. This year, 52% of merchants say they accept orders from beyond the borders of the U.S. and Canada. International orders constituted an average 17% of those merchants’ total orders this year.
Merchants with online revenue of $5 million to $25 million faced the most fraud. When compared with merchants with online sales of more than $25 million, mid-sized e-commerce merchants showed higher order-rejection rates (4.3% vs. 2.4%), higher manual review rates (34% of orders vs. 15%), and higher fraud loss rates (1.6% of revenue vs. 1.2%).
“We believe the largest merchants are simply better at fighting fraud—they make better use of fraud-detection tools and other resources,” says Doug Schwegman, director of market and consumer intelligence at CyberSource. “As they work through the growing pains of becoming a large merchant, mid-sized merchants’ fraud metrics may actually spike if they haven’t implemented the tools and established the review expertise to sufficiently protect them from the increase in the volume of fraudulent activity.”
The survey also found increased interest from merchants in automated fraud detection tools, by as much as two to three times in some cases, from 2007. However, merchants that manually review orders for fraud examined on average one out of every three orders, the same rate as in the four previous years.
The annual survey from the electronic payment services vendor also found that order-rejection rates tied to suspicion of fraud showed a significant drop to 2.9% of incoming orders, down from 4.2% in 2007. On average, 1.1% of accepted orders were fraudulent, CyberSource says.
Merchants have made little progress in minimizing the time spent manually examining good orders, CyberSource says. Merchants this year accepted an average of 73% of orders they manually reviewed, roughly the same percentage as last year. About half of merchants accepted 90% or more of the orders they reviewed.
“If you’re a merchant and you’re accepting this level of reviewed orders, there is a real opportunity for you to reduce costs and profits—simply through better initial automated order screening,” Schwegman says.
The survey, conducted between Oct. 21 and Nov. 11, was based on the responses of 400 online merchants in the U.S. and Canada.
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