E-Commerce Fraud Losses Rise As Big Sellers Get Hammered

Total losses from e-commerce fraud will hit $2.8 billion in 2005, up from $2.6 billion last year, with large and mid-sized merchants getting hit the hardest after several years of success in controlling the problem, according to a study released today. Although the overall rate of fraud loss will dip slightly, to 1.6% from 1.8% in 2004, merchants doing $5 million to $25 million in annual sales online expect their loss rate to rise to 1.8% from 1.5% last year and in 2003. Merchants selling $25 million or more in goods online say their loss rate will hit 1.2%, up from 1.1%. Smaller merchants, though, are seeing dramatic improvement, with those doing $500,000 to $5 million in e-commerce sales reporting losses plunging to 1.6% from 2.5% in 2004. Meanwhile, chargebacks coded as fraudulent are severely understating the fraud problem in the online channel. These are among the findings in CyberSource Corp.'s seventh annual fraud survey, which this year took in responses from 404 merchants doing business online, up from 348 in 2004. Survey respondents sell $28 billion in goods and services, or about 15% of all U.S. consumer sales online. The survey was conducted Sept. 16 to Oct. 6. The Mountain View, Calif.-based provider of transaction-gateway and fraud-management services says that just 37% of fraudulent orders are coded as chargebacks, with the remainder coming to light via other means, including direct contacts to merchants from customers. Of all fraud-coded chargebacks they receive, online merchants contest only 43%, and of these, they are successful with 39%–or about 17% of total fraud-related chargebacks. Online merchants continue to fight a costly battle in the back-office, trying to sift out bad transactions while struggling to keep up with the rising tide of orders. The survey shows 75% of merchants perform manual reviews of suspicious orders, representing little change from last year. But with order volume rising at a better than 20% annual rate, this manual-review rate means back-office personnel are confronted with a heavier workload at a time when more than 75% of merchants report they cannot add staff. On average, some 26% of orders call for manual intervention, and of these about two-thirds end up being accepted. This process, though, remains a game the fraudsters sometimes win. Respondents say some 1% of all orders accepted later turn out to be fraudulent, though this rate is down from 1.3% last year. And merchants inevitably turn down orders they suspect are fraudulent that are actually legitimate. They rejected 3.9% of orders on suspicion of fraud this year, down from 5.9% in 2004. Online merchants are increasingly adopting Verified by Visa and SecureCode–authentication tools from Visa and MasterCard?to prevent fraud. Although address verification (75%) and card-verification values (66%) receive the highest usage, the associations' payer authentication technologies are now used by 29% of online retailers, up from 25% last year, with another 22% reporting they plan to implement the service. Not surprisingly, credit and debit cards are by far the preferred payment method for these merchants, with 97% reporting they accept the cards. PayPal is accepted by 23% of merchants, up from 19% in 2004, while electronic checks through the automated clearing house are accepted by 20%, down slightly from 21%. Some 19% accept gift cards, up from 17%, and 9% report accepting Bill Me Later, up from 7%.