U.S. merchants will lose as much as $3 billion in e-commerce revenue to fraud in 2006, up from $2.8 billion the year before, according to the eighth annual CyberSource Corp. survey of e-commerce fraud.
Losses will be slightly less this year, with merchants expecting to lose 1.4 percent of revenue, down from 1.6 percent the year before, the report claimed.
Because e-commerce is growing so rapidly, however, even a declining percentage of revenue continues to yield higher dollar losses, per the report.
The Eighth Annual CyberSource Fraud Survey was conducted for Mountain View, CA-based electronic payment and risk management services provider CyberSource by Austin, TX-based Mindwave Research.
It was fielded Sept. 14 through Oct. 6, 2006, and yielded 351 responses. The sample was drawn from a database of companies involved in e-commerce activities.
Overall, merchants said 1.1 percent of accepted orders later turn out to be fraudulent. But merchants also said they are rejecting 4 percent of orders on suspicion of fraud.
CyberSource has historically asked merchants to estimate the percent of orders they accept that later turn out to be fraudulent, including those orders charged back through the banking system as well as any direct credits or reversals they issue.
According to merchants in 2006, fraud chargebacks only represented 35 percent of the fraud they experienced. The other 65 percent were handled at the merchant level through reversals or credits to the consumer.
Merchants are also responding to the opportunity represented by international e-commerce, according to the survey, with 61 percent of merchants accepting orders from outside the United States and Canada. Those orders represent 17 percent of their total order volume. Respondents said 2.7 percent of orders originating from outside the United States and Canada were fraudulent in 2006, a rate 2.5 times higher than the rate associated with U.S. and Canadian orders. Merchants reject 12.7 percent of international orders.
In response to fraud risk, more merchants than ever are reviewing some orders manually, according to the survey. In fact, 81 percent of merchants in the sample engage in manual review, compared to 73 percent last year.
In response to growing fraud losses and ever increasing e-commerce volume, merchants are turning to tools and systems that will automate and streamline fraud management efforts.
Overall, the use of anti-fraud tools grew 14 percent from 4.2 tools to 4.8 tools used per merchant. The largest merchants, those selling over $100 million online annually, average nearly 8 tools.
Almost every tool the survey addressed showed an increase in use, where comparative data was available. Those showing the greatest increase included positive lists (10 point increase to 21 percent), order velocity monitoring (10 point increase to 33 percent), IP geo-location (10 point increase to 35 percent) and company-specific fraud screens (10 point increase to 38 percent).
Positive lists are “known good” customers: order velocity monitoring assesses purchases over time by product, total dollar amount, frequency, product mix and similar measures.
IP geo-location tests evaluate the risk of an e-commerce transaction based on the “electronic address” of the purchaser as compared to other geographic data supplied with the order.
Merchant use of decision systems, which apply merchant-established business rules to inbound orders as they screen transactions for fraud, increased by 30 percent.