Cyber Fraud Eats into Retailers' Revenues

• Posted: Friday, December 22, 2006
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• Author: pradhana
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• Filed under: Online Services

In 2006, Web merchants in the US and Canada will lose $3.0 billion to online payment fraud.

By Jeffrey Grau - Senior Analyst

Web merchants are usually the ones to take the loss from online credit card fraud. CyberSource, a provider of secure electronic payment and risk management solutions to organizations, estimates that in 2006 Web merchants in the US and Canada will lose $3.0 billion to online payment fraud. While the volume of online fraud is increasing, its percentage of online retail sales is decreasing annually. In 2006 the value of online fraud will be 1.4% of total online sales, down from 1.6% in 2005 and 3.6% in 2000.

Fraudulent orders can be presented to merchants in two ways: as a chargeback from the merchant bank or as a direct request from a consumer for credit. In 2006, 65% of fraud claims were from customer credits, compared with 35% from chargebacks. By dealing directly with customers, retailers avoid penalty fees levied by the credit card issuers and show losses that understate the real amount of fraud.

The cost to retailers of online payment fraud is higher than the $3.0 billion in 2006 attributed to the monetary value of stolen goods and associated delivery/fulfillment costs. CyberSource found that the median amount Web merchants spend on fraud management is 0.3% of annual online revenues, with 16% of e-tailers spending as much as 4% or more of online revenues to manage fraud, up from 12% in 2005. The bulk of fraud management spending (46%) is for staff to review orders manually. This percentage increases to an average of 59% for merchants with greater than $25 million in online revenues. The remainder of fraud management is allocated to third-party tools (28%) and internal tools and systems (26%). Tools constantly need to be upgraded to keep up with increasingly sophisticated criminal techniques.

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