Online Merchants Improve Fraud Management

February 24, 2011

cybersource-fraud-revenue-loss-2010-feb-2011.JPGFor the second consecutive year, North American online merchants improved their fraud management performance in 2010, according to the CyberSource 2011 Online Fraud Report. In 2008, online fraud hit an all-time peak of $4 billion, which dropped 17.5% year-over-year to $3.3 billion, and another 18% year-over-year to $2.7 billion in 2010. Compared to 2008, online fraud in 2010 dropped 32.5%.

% of Revenues Lost to Fraud Declines

In 2008, online merchants estimated they lost 1.4% of online revenues to fraud. This revenue loss rate fell to 1.2% in 2009, and in 2010, merchants continued to make progress, reducing fraud losses to 0.9% of revenues, on average.

In 2010, study data indicates fraud pressure (as represented by the sum of the orders merchants reject due to suspicion of fraud, plus the accepted orders that later turn out to be fraudulent) actually increased from 2009 levels.

Larger Merchants More Likely to Use Fraud Detection Tools

cybersource-fraud-detection-tool-2010-feb-2011.JPGNot too surprisingly, online merchants reporting $25 million or more in annual online revenue are much more likely to invest in most types of online fraud detection tools than all online merchants combined. The one exception is validation services, used by 98% of both merchant groups.

However, a vast 91% majority of online merchants with $25 million or more online revenue use tools to track proprietary data and customer history, compared to two-thirds (66%) of all online merchants. Sixty-eight percent of larger online merchants use purchase device tracking tools, compared to 42% of all merchants.

And while usage trends of multi-merchant data/purchase history tools are low overall, larger online merchants still use them at about one-and-a-half times the rate of all online merchants (44% compared to 28%). Looking at usage rates of individual tools within categories, both merchant groups show the same general tendencies to use certain tools at higher rates than others.

Users of Fraud-scoring Model Most Satisfied

cybersource-fraud-effective-tools-2010-feb-2011.JPGBased on the percentages of online merchants using specific fraud detection tools that rate them as “top three” and “most effective,” company-specific fraud-scoring models (55%) provide the most satisfaction of any tool in any category.

Device fingerprinting tools followed at 45%, and led the purchase device tracking category. Negative in-house lists were third overall and second in the proprietary data/customer history category, following fraud-scoring models. The highest-ranking validation service, credit history check, placed fourth overall (34%).

Neither of the listed multi-merchant data/purchase history tools was listed as “top three” or “most effective” by more than 14% of users.

Manual Reviewers Process Median Orders Daily

cybersource-fraud-media-orders-2010-feb-2011.JPGThe median number of orders a reviewer processed in a day ranged from five for small merchants to 100 for large merchants, with an overall median of 50 orders per day. The rate is down slightly from 2009, which CyberSource says may reflect the fact that a lower percentage of orders are being out-sorted for manual review, allowing reviewers to spend more time investigating the truly suspicious and higher-risk orders.

Large merchants who typically have case management systems achieve 100% higher throughput per reviewer in the manual review stage, possibly due to greater use of review systems and detection tools during manual review. Typically, reviewers spent 9.5 minutes reviewing an order in 2010, up from eight minutes in 2009.

Merchants reported that reviewers were required to invoke and input data to four systems to review an order on average, up from an average of 3.7 in 2009. CyberSource says the ability to integrate or automate interfacing with these multiple systems represents an opportunity to further streamline the review process and increase reviewer productivity and effectiveness.

9 in 10 Retailers Report Organized Crime

According to the NRF’s sixth annual “Organized Retail Crime” survey, 89.5% of retailers polled said their company has been a victim of organized retail crime in the past 12 months in 2010, down from the 92.2% in 2009. The decrease in organized criminal activity is encouraging news for retailers, but understandable given the economic US economic downturn of 2009 and rebound in 2010.About the Data: The survey was conducted via online questionnaire by Mindwave Research. Participating organizations completed the survey between September 15 and October 19, 2010. All participants were either responsible for or influenced decisions regarding risk management in their companies.

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