Fraudsters Pocket $3 Billion From U.S. eCommerce in 2006

Results of the eighth annual CyberSource Corporation (Nasdaq: CYBS) survey of eCommerce fraud, released today, show that U.S. merchants will lose as much as $3 billion in eCommerce revenue to fraud in 2006, up from $2.8 billion the year before. As a percent of revenue, fraud losses will be slightly less this year-merchants expect to lose 1.4% of revenue, down from 1.6% the year before. This continues a long-term downward trend. In 2005, the reported fraud rate was 1.6%, and in 2004 it was 1.8%. Because eCommerce is growing so rapidly, even a declining percent of revenue continues to yield higher dollar losses.

Overall, merchants say 1.1% of accepted orders later turn out to be fraudulent. This number has been relatively steady for the last 3 years (1.0% in 2005, 1.3% in 2004). But merchants also say they are rejecting 4% of orders on suspicion of fraud. Even if only 1 out of 5 of those prove to be valid, merchants will have turned away another $1.6 billion in sales — likely losing them to a competitor.

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% of the fraud they experienced. 65% were handled at the merchant level through reversals or credits to the consumer.

Merchants are responding to the opportunity represented by international eCommerce — 61% of merchants accept orders from outside the U.S. and Canada, and those orders represent 17% of their total order volume. But this business carries greater fraud risk. Survey respondents said that in 2006, 2.7% of orders originating from outside the U.S. and Canada were fraudulent, a rate 2.5 times higher than the rate associated with U.S. and Canadian orders (1.1%). Merchants reject 12.7% of international orders, consistent with last year’s findings, a rate nearly 3 times that of orders originating in the U.S. or Canada.

In response to fraud risk, more merchants than ever before are reviewing some orders manually. 81% of merchants in the sample now engage in manual review, compared to 73% last year. While the practice of manual review has increased, the rate of review may have peaked in 2005. On average, merchants who perform manual review are reviewing 28% of their orders, a 20% change from 35% in 2005. Larger merchants perform better than the average, citing review of one in seven orders.

In response to growing fraud losses and ever increasing eCommerce 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% from 4.2 to 4.8 tools utilized 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 is available). Those showing the greatest increase included positive lists (10 point increase to 21%), order velocity monitoring (10 point increase to 33%), IP geolocation (10 point increase to 35%) and company-specific fraud screens (10 point increase to 38%). 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 geolocation tests evaluate the risk of an eCommerce transaction based on the “electronic address” of the purchaser as compared to other geographic data supplied with the order.

“eCommerce merchants are throwing every available weapon at fraud,” said Doug Schwegman, CyberSource director of customer and market intelligence. “The increase in use of anti-fraud tools and of case management systems is paralleled by lower review rates and a 50% jump in reviewer efficiency. The continuing growth of eCommerce orders means we need to see continued increases in merchant fraud management efficiencies to keep profits rising.”