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U.S. E-Commerce Fraud Total Will Hit $4 Billion, Study Says

Online fraud costs merchants about 1.4 percent of their top-line revenue annually, survey says
U.S. companies that do electronic commerce will lose a record $4 billion to online fraud this year, but they are taking steps to fight it, according to a report issued today.

According to the annual Cybersource survey on e-commerce fraud, e-commerce fraud is up slightly over 2007, when it set the previous record of $3.7 billion. The 2008 figure represents about 1.4 percent of merchants' total online revenue for the year -- roughly the same percentage of loss that merchants have experienced in each of the past three years.

"For years, U.S. e-commerce merchants have fought fraudsters to what amounts to an annual standoff," says Doug Schwegman, CyberSource director of market and customer intelligence. "Losing on average about 1.4 percent of sales to fraud has been the constant. 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."

To date, many merchants have been fighting fraud by flagging suspicious orders and reviewing them manually, Cybersource says. For each of the past six years, approximately one out of every four online orders has been manually reviewed, and in 2007 approximately 4.2 percent of orders were rejected due to suspicion of fraud.

This year, however, merchants are accepting a higher percentage of orders, rejecting just 2.9 percent, according to the study. "Falling rejection rates, coupled with steady fraud rates, imply that merchants are more successful this year than in previous years at fighting fraud," the study says.

Midsize merchants " those with online revenue of $5 million to $25 million -- are most challenged by online fraud, the study says. When compared with larger merchants, midsize companies show higher order rejection rates (4.3 percent vs. 2.4 percent), higher manual review rates (34 percent of orders, vs. 15 percent), and higher fraud loss rates (1.6 percent of revenue vs. 1.2 percent).

"We believe the largest merchants are simply better at fighting fraud," Schwegman says. "They make better use of fraud detection tools and other resources. And, as they work through the growing pains of becoming a large merchant, midsize merchants' fraud metrics may actually spike if they haven't implemented the tools and established the review expertise to sufficiently protect them from the increase in the volume of fraudulent activity." Fraud chargebacks can represent a profit potential for merchants, the study says. Currently, merchants fight only about half of the fraud chargebacks they receive. One-third of merchants challenge fewer than 10%. But merchants that do elect to challenge chargebacks recover, on average, 28% of their fraud chargebacks. "For many merchants, this remains an untapped opportunity," Cybersource says.

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