eCommerce Fraud Losses to Jump $700 Million in 2004
6th Annual CyberSource fraud survey indicates 37% increase in lost revenue Small and medium businesses hit hardest
Key take-aways from this year's survey include:
- Fraudsters will take more than $2.6 billion* out of eCommerce in 2004-- a 37% increase over the 2003 estimate.
- The cost of managing fraud jumped. Merchants are rejecting 28% more orders due to suspicion of fraud. Rates of manual review increased 17%. Merchants are using more tools to combat fraud.
- Bottlenecks around the corner? Merchants believe that online sales will grow 39% in 2005, but 79% have no plans to hire more order review staff.
- The rate of fraud, as a percentage of online revenues, has not increased from last year. But growth in online sales means increases in fraud losses.
- International eCommerce continues to be a higher risk, with order rejection and fraud rates up to three times higher than domestic orders.
MOUNTAIN VIEW, Calif., November 15, 2004
The sixth annual survey of eCommerce fraud released today by CyberSource Corporation (Nasdaq: CYBS) shows that U.S. merchants expect to lose an estimated $2.6 billion to online fraud in 2004, $700 million more than in 2003. The new estimate beats the prior fraud loss record of $2.1 billion established in 2002.
Though merchants feel they are limiting the rate of fraud loss (this year's loss rate of 1.8% of sales is statistically level with last year's 1.7%), eCommerce revenue is growing so fast that a steady fraud rate means ballooning dollar losses. And fraudsters tend to be attracted to higher ticket price items. The median price on fraudulently ordered merchandise in 2004 was $150 while the median amount for a legitimate purchase was $100.
Hardest hit are the mid-range companies, those with annual online revenues between $500,000 and $5 million. This group says it expects to lose up to 2.5 % of its online revenue to fraud, compared to 1.9% last year. Larger companies fare better. Those with revenues between $5 million and $25 million experience a loss rate of 1.5%, identical to the year before. Companies with annual revenues greater than $25 million anticipate losses of 1.1%, slightly less than last year's 1.3% loss rate. Doug Schwegman, CyberSource director of market intelligence called that a "predictable" finding. "Most companies achieving high levels of growth over a number of years acquire a level of sophistication in fraud prevention that renders the problem more manageable," Schwegman added.
One other alarming note that emerged in the findings was the estimated fraud rate experienced in international eCommerce. High growth rates outside the U.S. make foreign eCommerce an important initiative for U.S. merchants, but one that brings more risk. Survey data shows international orders are rejected twice as often as orders from North America. Those merchants who accept orders from outside the U.S. and Canada say they reject over 13% of orders just on suspicion of fraud. And among those orders accepted, 3.8% turn out to be fraudulent, a rate nearly 3 times higher than the overall rate.
The good news
There is good news in this year's survey. Electronic commerce continues to grow. Merchants surveyed expect their eCommerce revenues to increase by 39% in 2005. And, on average, fraud rates have slightly decreased. Among all the orders merchants accept, on average, 1.3% turn out to be fraudulent. The average fraud rate in 2003 was statistically similar at 1.4%. In 2004, 50% of merchants complained of fraud rates equal to or greater than 1%, a slight improvement over 2003 where 58% of merchants experienced such fraud rates. "The simple fraud rate is going down, especially for larger, more sophisticated merchants," says Schwegman. "We noted the beginning of this trend in 2001 and it has continued. So on one front, merchants can claim a real success. The problem lies in how much that success is really costing."
The cost of controlling fraud
The highest costs associated with the management of fraud are typically loss of potential revenue and wages. A key source of revenue loss occurs when good orders are rejected for fear of fraud. According to the survey, rejection rates during 2004 were nearly 6%, up from 4.6% last year. So for every confirmed fraudulent order, merchants are refusing to accept another 4 to 5 orders on suspicion of fraud. Significant revenue is being left on the table if even a small portion of these orders are valid.
Manual order review and its associated costs are equally threatening to merchant profits. In what should be an automated sales environment, 73% of merchants are manually checking orders today, up 12% from last year. Across all surveyed merchants, the number of orders being manually examined increased by 20%: 27% of all orders were manually reviewed in 2004 versus 23% of all orders 2003. This leads to obvious questions about merchant capability of coping with continuing eCommerce growth. According to the survey, only 21% of merchants expect to increase the size of their review staff in 2005, so greater productivity among order checkers is clearly required.
Merchants' use of fraud tools is at an all-time high now. In addition to manual review, 82% of merchants use Address Verification Service, 56% use Card Verification Number checking, and 53% use internally-built fraud screens. The number of merchants using commercial fraud screening solutions grew 55% from the year before: 18% in 2003 and 28% in 2004. The median number of tools in use now is 5, and 40% of merchants are using 6 or more. Large merchants are the most likely to invest in automation, with 79% of those with $25 million or more in revenue having automated order screening systems.
"Businesses are telling us they're seeing more sophisticated fraud attempts," said Schwegman. "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."
To obtain a copy of the survey results -- for journalists: call or email Bruce Frymire (650-965-6042, bfrymire@cybersource.com). For all others: please visit http://www.cybersource.com/fraudreport/
The Sixth Annual CyberSource Fraud Survey was sponsored by CyberSource Corporation and undertaken by Mindwave Research. The survey was fielded September 17 through October 1, 2004 and yielded 348 qualified and complete responses (vs. 333 the year before). The sample was drawn from a database of companies involved in electronic commerce activities. Incentive to respondents was a summary of the research findings.
About CyberSource
CyberSource Corporation is a leading provider of electronic payment and risk management solutions. CyberSource solutions enable electronic payment processing for Web, call center/IVR, and POS environments and manage fraud risk associated with card-not-present transactions. CyberSource Professional Services designs, integrates, and optimizes enterprise-wide commerce transaction systems. Over 5,000 businesses use CyberSource solutions, including half of the Dow Jones Industrial companies. The company is headquartered in Mountain View, California, and has sales and service offices in Japan, the United Kingdom, and other locations in the United States. For more information, please visit CyberSource's web site at www.cybersource.com or email info@cybersource.com.
Editorial Contact:
Bruce Frymire
CyberSource Corporation
650.965.6042
bfrymire@cybersource.com
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