Merchants expect to lose a record $4 billion to online fraud in 2008 and say they think the fraud loss rate will hold constant at 1.4% of revenue (same as 2007 and 2006), according to the tenth annual CyberSource Corporation survey of e-commerce fraud, reports Retailer Daily.
Continuing growth in e-commerce sales mean, however, that dollar losses to fraud are still growing.
Among the key takeaways from this year’s survey:
- Projected dollar losses to US e-commerce will hit a record $4 billion in 2008 (up from $3.7 billion in 2007).*
- Merchants expect to lose 1.4% of their online revenue to fraud – this rate has held constant for the last three years.
- This year merchants accepted a higher percentage of orders – working more aggressively to boost topline sales.
- Though e-commerce sales are still increasing, 87% of merchants say they must fight fraud with the same or less staff in 2009.
- Contrary to popular view, e-commerce is hardly hands-off. For each of the past six years, some 1 in 4 online orders have been manually reviewed.
- International orders continue to have over three times the fraud risk of orders from the US and Canada.
Bellow, more findings from the study.
Fighting Fraud
Perhaps as an adjustment to a slowing economy, merchants are shifting some fraud-fighting priorities, according to the study.
“This year, however, for the first time, merchants could not rely on double-digit market expansion to bolster online revenue growth or to cover inefficiencies,” said Doug Schwegman, CyberSource director of market and customer intelligence.
“In two key areas–lower order-rejection rate and higher interest in automated tools–merchants seem to be managing more aggressively in a challenging economy.”
Order rejection rates because of suspicion of fraud, which have been consistent for several years at around 4% of incoming orders, showed a significant drop in 2008, falling from last year’s 4.2% to 2.9%.
In short, merchants are accepting a higher percentage of the orders they receive. This trend was seen across all types and sizes of merchant. Falling rejection rates coupled with steady fraud rates imply that merchants are more successful this year than in previous years at fighting fraud.
On automated fraud detection tools, there is evidence of increasing interest. This year’s survey asked merchants about their plans to implement 14 tools that had also been studied in 2007. In every case the intent to implement increased–in some cases by as much as two to three times.
These fraud detection tools can provide an automated assessment of the fraud potential of a transaction and can reduce reliance on human involvement. 87% of merchants do not expect to add review staff in 2009, representing the most conservative staffing seen in the survey.
Fraud Rates Plateau
For the third consecutive year, e-commerce merchants said on average they will lose 1.4% of their online revenues to fraud. Their fraud rate on accepted orders averaged 1.1% in the US and Canada.
The consumer electronics category showed the highest fraud rate for the year among eight industry segments measured – 2% of accepted orders, nearly double the average.
Once again merchants reported that only about half of their fraud is reported via chargeback (bankcard holders’ disputing a charge with the issuing bank), with the remainder coming directly through their customer-support functions.
Midsize Merchants Most Challenged
While overall averages have remained relatively flat, a consistent trend in the market has emerged: Merchants with online revenues of $5 million to $25 million are most challenged by online fraud.
Compared with larger merchants (online sales of $25M+), the midsize e-commerce merchants show higher order rejection rates (4.3% versus 2.4%), higher manual review rates (34% of orders, versus 15%) and higher fraud loss rates (1.6% of revenue versus 1.2%).
Still Looking at Too Many Good Orders
To optimize use of expensive manual review operations, merchants need to minimize the amount of time spent examining good orders, but the survey results show little progress in this area:
- Merchants this year said they ultimately accepted 73% of orders they manually reviewed, roughly the same as last year.
- Approximately half of the merchants accepted 90% or more of orders they reviewed
Profit Opportunities Missed
Fraud chargebacks can represent a profit potential for merchants:
- Data from this year’s survey shows that merchants currently fight only about 50% of the fraud chargebacks they receive.
- One-third of merchants challenge less than 10%.
- But merchants that do elect to challenge chargebacks recover, on average, 28% of their fraud chargebacks.
International Risk Still High
This year, 52% of merchants say they accept orders from beyond the borders of US and Canada, and those merchants say international orders constitute an average of 17% of their total orders in 2008.
This growing market opportunity brings more than its share of risk, however: Merchants say fraud on international orders was 3.6 times higher than fraud on domestic orders. Since 2006, fraud on international orders has grown from 2.7% to the current 4%.
* Dollar losses are estimated by applying the survey data on anticipated percentage of revenue lost to an estimate of 2008 US e-commerce revenues of $285 billion, derived by multiplying Forrester Research’s 2007 estimate of e-commerce revenues (published January 2008) by a growth rate of 9.2%. That growth rate for total US e-commerce is from eMarketer’s December 2008 forecast.
About the study: The tenth annual CyberSource fraud survey was commissioned by CyberSource Corporation and fielded October 21 through November 11, 2008, yielding 400 qualified and complete responses. The sample was drawn from a database of companies involved in electronic commerce activities. Incentive to respondents included a summary of the research.
