November 13, 2007, 12:00 AM

Fraud losses will grow in step with sales this year, CyberSource projects

Dollar losses from e-commerce fraud will grow 18% this year to $3.6 billion, reports the annual merchant fraud survey from payment processor and risk management company CyberSource. The percent of sales merchants expect to lose to fraud remains at 1.4%.


Dollar losses from e-commerce fraud will grow 18% this year over last to $3.6 billion, reports the ninth annual merchant fraud survey from payment processor and risk management company CyberSource Corp. The percent of sales that merchants expect to lose to fraud remained stable over 2006 and 2007 at 1.4% both years. The higher dollar losses are the result of growth in online retail sales.

Merchants report that 1.3% of accepted orders this year have turned out to be fraudulent, up from 1.1% last year. And they report they are reviewing 27% of orders, up from 23% in 2006. Of the orders merchants review, 75% are accepted as legitimate.

Merchants rejected 4.2% of U.S. and Canadian orders on suspicion of fraud. The survey reports that orders originating from outside the U.S. and Canada are 2.8 times more likely to be fraudulent.

"E-commerce in the U.S. today is a highly rewarding channel that is showing vigorous growth,” says Doug Schwegman, CyberSource director of customer and market intelligence. "But it`s also a channel with meaningful challenges posed by systematic fraud. Merchants did see their online sales grow approximately 20%, but the costs of managing fraud grew a nearly identical amount. The picture is one of merchants swimming harder against an accelerating current.”

CyberSource also reports that merchants are adding anti-fraud tools to their e-commerce systems, with the average number of tools employed by merchants this year at 5.4 vs. 4.8 the year before. 53% of merchants surveyed used five or more fraud detection tools. The largest merchants used an average of eight. Such advanced fraud screening techniques include velocity monitoring, which detects suspicious purchase patterns, and IP geolocation, which can help pinpoint the geographical origination point of an order on the Internet.

CyberSource also reports that the transaction chargeback figures from the card companies understate the extent of merchants’ fraud losses. CyberSource asks merchants in the survey to estimate the percent of orders they accept that later turn out to be fraudulent, including orders consumers charged back through the banking system as well as any direct credits or reversals they issue. According to merchants in 2007, formal fraud chargebacks represent only about 44% of the fraud they experience. 56% were handled by merchants through reversals or credits to the consumer.



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