Fraudsters will make away with $700 million more in e-commerce revenue this year than last, according to new research.
CyberSource in the sixth installment of its annual fraud survey found businesses will lose $2.6 billion to online fraud in 2004 – a 37% increase over 2003 figures.
In addition, the cost of managing fraud jumped, says CyberSource, which specializes in electronic payment and risk management services for retailers. Merchants are rejecting 28% more orders because of suspicion of fraud, and manually reviewing 17% more orders, the vendor says.
On the positive side, retailers have had some success limiting fraud loss. This year fraudulent orders account for 1.8% of online sales, which is statistically level with last year’s 1.7%, CyberSource says. The $700 million swing in fraud losses is due to growth in e-commerce revenue: The 348 merchants surveyed expect their e-commerce revenue to increase by 39% in 2005.
Small and midsize businesses with $500,000 to $5 million in online revenue have taken the hardest hit, according to CyberSource. This group will lose up to 2.5% of its online revenue to fraud, compared to 1.9% last year.
Meanwhile, companies with online revenue between $5 million and $25 million will see a loss rate of 1.5% (same as last year), and those with $25 million-plus revenue anticipate losses of 1.1% (down slightly from last year’s 1.3% loss rate).
International e-commerce orders continue to spell more trouble for retailers, with order rejection and fraud rates up to three times higher than domestic orders. Merchants that accept orders from outside North America reject over 13% of orders on suspicion of fraud, CyberSource says. Among orders accepted, 3.8% turn out to be fraudulent – which is nearly 3 times higher than the overall rate.
“Businesses are telling us they’re seeing more sophisticated fraud attempts,” said Doug Schwegman, director of market intelligence at CyberSource, in a statement. “Though many are succeeding in containing fraudulent order rates, the strain is showing in their rejection and review rates and their need for more tools.”
Indeed, a big impact of e-commerce fraud is the loss of potential revenue to merchants when suspicious – but not necessarily fraudulent – orders are rejected. According to the survey, merchants rejected nearly 6% of orders in 2004, up from 4.6% in 2003. This means for every confirmed fraudulent order, merchants are refusing another 4 or 5 orders on suspicion of fraud, CyberSource says. If a portion of these orders are valid, that’s money left on the table.
Also eating into merchant profits is a reliance on manual order reviews. According to CyberSource, 73% of merchants manually check orders today, a 12% increase over last year. In addition, the number of orders being manually reviewed rose to 27% of all orders, up from 23% in 2003.
On the flip side, however, more merchants are turning to automated fraud tools for help. In addition to manual review, 82% of merchants use address verification services, 56% use card verification number checking, and 53% use internally-built fraud screens.
