January 6, 2005, 12:00 AM

How geolocation can reduce the risk of online fraud

A hefty chunk of fraudulent U.S. online retail transactions originate overseas, while at home, orders placed from states that don’t match billing and shipping addresses prove risky. Geolocation cuts the risk by showing where the order is coming from.


Effective online fraud prevention may involve several technologies, each geared toward a specific fraud indicator. But in the arsenal of online anti-fraud tools, IP geolocation is one that’s getting more attention from retailers. Quova Inc., whose technology identifies the geographic location of web site visitors, estimates that the number of e-retail customers deploying geolocation as part of an online fraud prevention program is up 500% in the past year. A recent Cybersouce report found that 31% of the e-commerce businesses it surveyed already use geolocation, while another 22% are planning on implementing it within the next year.

The Internet Fraud Prevention Advisory Council has estimated that the incidence of online fraud as a percentage of business revenues at up to 40 times higher than offline transactions in which the buyer is physically present. That’s facilitated in part by the anonymity of the online customer.

Last year, for example, the risk management arm of the information company LexisNexis studied more than 100,000 transactions by a major online retailer using the Quova technology embedded in its risk scoring engine. The study found that 75% of identified fraudulent orders with U.S. billing addresses had been placed from overseas. It also found that in over 85% of fraudulent domestic transactions, the customer’s billing address didn`t match the state from which the order was actually placed, and that fraud rates were 15 times higher for such mismatched transactions.

Geolocation cuts that risk by determining the geographic location of a web site visitor in real time, comparing data on the visitor’s IP domain of origin with billing and shipping addresses supplied an order, and flagging the merchant. It’s then up to the merchant to determine a course of action. Quova reports that one U.S. online retailer using its technology, for example, reduced its fraud losses by 15% after deciding to block orders from the 15 U.S. cities it had identified as the source of more than half its fraudulent transactions. “Geolocation technology helps the merchant to create a rules system that balances the dual risks of fraud losses and blocking legitimate customers,” says a Quova spokesman.


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