January 19, 2006, 12:00 AM

Online fraud rate stable, but dollar loss is up, says CyberSource

CyberSource’s annual online fraud survey finds that at less than 2%, the percentage of online sales lost to fraud was little different in 2005 than in 2004, but rising online sales volume drove dollar losses from $2.6 billion to $2.8 billion.

The percentage of online revenue lost of fraud has been relatively stable over the past few years, according to CyberSource Corp.’s Seventh Annual Online Fraud Report – but the volume of e-commerce sales is driving a rising trend in dollars lost, with an estimated $2.8 billion lost to online fraud in 2005, up from $2.6 billion the previous year.

The report notes the percentage of revenues lost to fraud online was 1.8% in 2004 and actually slightly less, 1.6%, in 2005. But during that time, a 20% growth in e-commerce drove the dollar value represented by those percentages up to $2.8 billion in 2005 from $2.6 billion in 2004.

Online merchants with annual revenues of less than $5 million continue to experience higher rates of fraud, though CyberSource reports that their rate of fraud loss declined slightly during 2005. By contrast, merchants in the range of $5 million to $25 million experienced the greatest increase in loss rates over the year. CyberSource speculates that`s because this group is “operationally challenged;” the most likely to be migrating from an environment of a lower sales volume accompanied by a high degree of manual order review to one in which order volume is higher and they’re struggling to automate review.

In 2005, CyberSource reported, manual review rates stabilized after rising for the previous four years. 73% of merchants are engaging in manual order review, with merchants having online revenues of less than $5 million have the highest order review rate at 28% of orders.

Merchants selling more than $5 million online review 15% to 25% of orders and are looking to automate that process. Medium and large-sized merchants in general employ twice the number of screening tools as smaller merchants and are two times as likely to use automated decision systems, the survey found. Surveyed merchants reported a rate of fraud associated with international orders twice as high as the overall average, and that they reject international orders at a rate three times higher than the overall average.

With e-commerce growing at the rate of about 20% a year, large merchants in particular can expect their existing fraud management capacities to be challenged by higher order volume. Their fraud management efficiency will have to increase by the same degree every year, and exceed 20% for healthy business growth, according to CyberSource.

To maximize efficiency, the report argues, online merchants should move beyond a sole focus on managing chargebacks to plug “profit leaks” throughout risk management operations; for instance, scrutinizing manual review in terms of staffing and scalability demands and looking at sales lost as the result of order acceptance and rejection policies. CyberSource notes that medium and large-sized online retailers appear to be coming out slightly ahead by accepting a slightly higher number of fraudulent orders. Such merchants, according to the survey report, may be “examining the trade-off between valid order rejection and fraud acceptance, and making a bottom-line ‘net profit’ decision in the face of operational realities.”

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