Online Merchants May Have a Tougher Time with Fraud in 2009

While online merchants managed to keep a lid on fraud losses in 2008, a faltering economy could make 2009 a costlier year, a leading expert says. “It'll be interesting to see if merchants can hold fraud rates steady” next year, says Doug Schwegman, director of market and customer intelligence at CyberSource Corp., an online-gateway provider in Mountain View, Calif. “As more people become unemployed, there might be more fraudsters out there.” While e-commerce merchants will lose a record $4 billion to fraud in 2008, growing revenues mean the loss rate will hold steady at 1.4% of sales, level with last year and 2006, according to CyberSource's annual online fraud survey, released on Wednesday. Moreover, merchants kept the loss rate in check while at the same time approving more orders. On average, e-retailers are rejecting 2.9% of all orders on suspicion of fraud, down from 4.2% in 2007 and similar levels in prior years. “This was the first year we saw a statistically significant drop” in the rejection rate, says Schwegman. The study just released represents CyberSource's 10th annual report on online fraud. But the recession may cause fraud to take a heavier toll on e-commerce next year, Schwegman says, despite merchants' best efforts to fight it with new technologies. That's because people who lose their jobs or see their incomes cut may be tempted to try their hand at e-commerce fraud. At the same time, the fraud rate may rise if online sales slow down. “People are price conscious and are tightening their belts,” says Schwegman. E-commerce, he says, is not “recesson-proof” but tends to be “recession-resistant” as consumers turn to the Internet to find bargains. A sour economy is likely to affect how merchants combat fraud, as well, Schwegman says. For example, only a minority of fraud cases?42%–are handled through the card networks' chargeback systems, according to CyberSource's report. The balance are resolved through credits online merchants issue to customers who report a fraudulent charge on their accounts. Up to now, this has proven a sensible alternative for merchants, since it allows them to avoid some of the drawbacks of the chargeback process, including penalties the networks levy if chargebacks exceed certain thresholds. “It makes sense to issue a credit on the spot to avoid having a chargeback on your record, plus the fees and expenses” says Schwegman. But merchants may be more inclined to challenge chargebacks?and less inclined to issue credits?as the economic picture darkens. The CyberSource study reveals that when merchants fight fraud-coded chargebacks, they win 44% of the cases and recover 28% of the disputed dollars. But it also shows that merchants fight only 50% of such chargebacks. “There's some cost involved, but we think merchants net net could come out ahead if they did challenge more,” says Schwegman. “They are leaving money on the table.” That means online merchants could fight more chargebacks next year as they seek ways to boost revenues. “I would bet money on [a higher challenge rate],” Schwegman says. That will likely lead to fewer cases getting resolved directly with consumers. “It'll be interesting to watch,” he says. “They may be less free in handing out credits.” Even merchants' ability to continue driving down order-rejection rates while keeping fraud in check could come under pressure in 2009 as the recession sets in?though the relative youth of online selling means it's hard to predict how well merchants will do. “They may be able to do that in '09, but we haven't been through too many economic cycles with e-commerce,” says Schwegman. For its study, CyberSource surveyed 400 merchants, 56% of which are clients, between Oct. 21 and Nov. 11. To estimate fraud losses, the company applied the loss rate reported by respondents to an estimated $285 billion in total e-commerce sales.