Merchants Hit Back at eCommerce Fraud

CyberSource survey shows fraudsters' theft of online revenue drops 18% in 2009

MOUNTAIN VIEW, Calif., Nov. 17 -- Results of the eleventh annual CyberSource Corporation (NASDAQ:CYBS) survey of eCommerce fraud, released today, show that merchants in 2009 were fighting back against fraud, and seeing considerable evidence of success.

U.S. and Canadian merchants expect to lose about $3.3 billion to eCommerce fraud this year, down from $4 billion last year. This is the first drop in estimated revenues lost since 2003. The percentage of revenue merchants predict they will lose in 2009, on average, is 1.2%, the lowest estimate in the 11-year history of the survey.

"The eCommerce fraud picture has typically been one of worsening merchant losses," said Doug Schwegman, CyberSource Director of Market and Customer Intelligence. "This year, merchants have won back some ground. In an economy where many predicted fraud challenges would increase, eCommerce merchants in the U.S. and Canada fared better than they have in the past against fraudulent online payment. There are still many ongoing challenges, including better and more sophisticated efforts on the part of fraudsters, but it is a pleasure to report on progress made."

Gains a result of better tools, merchant effort

The survey suggests merchant success has come as a result of many factors, including greater use of automated decision tools to sort orders (67% used these in 2009, vs. 56% the year before). As one example, device fingerprinting, a means of identifying the source of orders by a computer's operating characteristics (its "fingerprint"), almost tripled in use among merchants that do more than $25 million in online sales per year. 18% of those merchants used device fingerprinting in 2009, and nearly half the sample of large merchants (45%) say they will implement the technology in 2010. One-third of survey respondents this year said they had changed their procedures to respond to fraudsters and 68% now track the success of orders they have manually reviewed to get a better understanding of their fraud management and a means of improving results. Last year, only 54% of merchants tracked those successes and failures.

Significant challenges remain

Vigilance is still key for merchants in an arena that will give up over $3 billion to fraud. One in five respondents said that fraud schemes were increasingly complex this year, and almost half say fraudulent orders appeared "cleaner" (more like valid orders) than in the year preceding. Mid-sized merchants, those with eCommerce revenues of $5 million to $25 million, were hardest hit in 2009, with 1.3% of accepted orders resulting in a fraud loss. And while all industries showed the impact of fraud, by far the most challenged was consumer electronics with its abundance of small, typically expensive, easily "fenced" products. This segment had more than double the rejection rate (orders rejected due to their appearance of fraud) of the next highest group, rejecting 6.6% of orders received. Consumer electronics also reported the highest fraudulent order rate of any industry segment at 1.5%--67% higher than average.

Merchants hitting stride internationally

Fifty-four percent of merchants now accept orders originating from outside the U.S. and Canada, up from 51% in 2008. Among that group, international orders comprise 21% of order volume--demonstrating the opportunity for online merchants not yet selling beyond U.S. and Canadian borders. Fraud has long been an inhibitor to companies looking to sell product or services abroad, but this year's survey brings optimism. Fraud rates on international orders dropped 50% this year and order rejection rates dropped 30%. Though the fraud rate has gone down, it's still double the domestic rate and order rejection rates are 7.7%, over three times the rate for domestic orders.

Manual review still major hurdle

Seventy-two percent of merchants manually review orders and, on average, review 28% of the orders they process. But automation pays. Larger merchants use more automated tools than their smaller counterparts (7.3 tools this year, vs. 4.7 for the overall sample), and achieve lower manual review rates (15%). Companies with products that sell for $200 or more are less likely to allow automated systems to reject orders without manual review.

Looking to 2010--more automation

When asked about priorities for the year ahead, 60% of merchants with eCommerce sales greater than $5 million said their top priority was improving the automated detection and sorting capabilities of their systems. Twenty percent said they were looking to improve their process analytics capabilities, and 16% are focused on streamlining the tasks and workflow around manual review.

"This isn't a battle that can ever be won outright," continued Schwegman. "But we're certainly going to make life difficult for the bad guys."

To obtain a copy of the survey results -- for journalists: please call or email Bruce Frymire (650-965-6042, bfrymire@cybersource.com). For all others: please visit www.cybersource.com/fraudreport2010 .

The eleventh annual CyberSource fraud survey was commissioned by CyberSource Corporation. The survey was fielded September 10 through October 7, 2009 and yielded 352 qualified and complete responses. The sample was drawn from a database of companies involved in electronic commerce activities. Incentives to respondents included a summary of the research.

Source: CyberSource