Fraudsters Will Bag $3.6 Billion from U.S. eCommerce in 2007

Key take-aways from this year's survey include:

  • Dollar losses from eCommerce fraud continue to grow. Fraudsters will divert approximately $3.6 billion from U.S. eCommerce in 2007, a 20% increase over 2006.
  • The percent of revenue merchants say they will lose to fraud remained stable over 2006 and 2007 (1.4% both years), but because eCommerce sales continue to grow, dollar losses to U.S. eCommerce grow proportionately.
  • Approximately 1.3% of accepted orders ultimately turn out to be fraudulent, up from 1.1% the year before. But merchants also reject 4.2% of U.S. and Canadian orders on suspicion of fraud. Also, chargeback statistics may represent only half of the actual impact of fraud.
  • Merchants are increasing the number of fraud detection tools they use to manage payment fraud risk--the largest merchants now use an average of eight.
  • The cost of fraud containment continues to rise. In 2007, merchants say they are reviewing 27% of their orders, up from 23% the year before. Of the orders merchants review, three out of four are ultimately accepted as legitimate.
  • Merchants say orders originating from outside the U.S. and Canada are 2.8 times more likely to be fraudulent. These higher fraud rates could deter some merchants from expanding into this high-growth sector.

MOUNTAIN VIEW, Calif., November 13, 2007

Results of the ninth annual CyberSource Corporation (NASDAQ: CYBS) survey of eCommerce fraud, released today, show that U.S. merchants are succeeding in holding the fraud rate stable, but they are expending considerably more resources in the effort. Merchants estimate that 1.4% of their online sales will line the pockets of fraudsters this year--identical to last year--but much higher volumes spent in U.S. eCommerce means the dollar losses are approximately 20% higher The result: criminals will unlawfully carry off $3.6 billion in goods and services this year--up from $3.1 billion in 2006

"eCommerce in the U.S. today is a highly rewarding channel that is showing vigorous growth," said Doug Schwegman, CyberSource director of customer and market intelligence. "But it's also a channel with meaningful challenges posed by systematic fraud. Merchants did see their online sales grow approximately 20%, but the costs of managing fraud grew a nearly identical amount. The picture is one of merchants swimming harder against an accelerating current."

Use of fraud tools increasing

In response to the fraud challenge, merchants are adding more anti-fraud tools to their eCommerce systems, such as order velocity monitoring, which detects suspicious purchase patterns, or IP geolocation, which can help pinpoint the physical origination point of an order on the internet. In 2007, 53% of merchants surveyed used five or more fraud detection tools. The largest merchants used an average of eight. The average number of tools employed by all sizes of merchants this year was 5.4 vs. 4.8 the year before. One outcome of adding fraud detection tools is that more orders may be diverted for manual review--placing added pressure on these teams. 27% of orders were manually reviewed in 2007, compared to 23% the year before. With online sales growing at about 20% per year, it appears that the number of orders requiring manual processing is growing faster than online sales--driven especially by the experience of small to mid-sized merchants. Overall, CyberSource estimates that approximately 38% more orders were reviewed in 2007 than in 2006, and that extra diligence may have cost merchants an extra $100 million.

Challenge: review the right orders

This year's survey shows that three out of four orders that are manually reviewed are ultimately accepted, compared to two out of three last year. So merchants are not only reviewing more orders, they are accepting a higher percentage of those they review. "The efficiency equation seems to be moving in the wrong direction for some merchants," said Schwegman. "The continuing onslaught of fraud has merchants evaluating every angle of automation. But new tools need to be carefully orchestrated into their systems so merchants can move towards less, not more, manual processes. Significant backups in the review queue mean high costs to merchants and longer wait times for customers. Reviewing more orders may also contribute to rejecting more valid orders in total."

According to this year's fraud survey, the portion of merchant fraud management budgets allocated to staff, as opposed to systems, has increased from 46% last year to 52% in 2007. Overall budgets kept pace with sales growth, so the total dollars merchants spent on manual review staff has increased 34%.

Rejection due to suspicion of fraud remains high

The average percent of orders that are automatically or manually rejected prior to shipment due to suspicion of fraud remains relatively constant--4.2% this year vs. 4.1% last year--which gives rise to concern over valid order rejection. "Year after year, this is one of the most significant statistics we see," explained Schwegman. "For many merchants, there is just as much to be gained in accepting more good orders that they may be mistakenly blocking as there is in reducing fraud. For example, in just one industry segment, consumer electronics, rejection rates varied wildly from 0.05% to 20%. Meanwhile they all report fraud rates of 2% or less. So you have to wonder - in those high rejection rates, how many are actually good orders?"

International eCommerce: inviting but still challenging

Approximately 60% of U.S. and Canadian merchants accept orders that originated outside those borders (roughly unchanged from last year). International orders represented, on average, 16% of these merchants' total order volume. But these merchants say, as they have in previous years, that international orders carry a disproportionate risk of fraud. Over 11% of non-U.S./Canadian orders are rejected due to suspicion of fraud, and it would appear these suspicions are warranted. Merchants say 3.6% of accepted international orders ultimately turn out to be fraudulent, a rate 2.8 times that associated with domestic orders. These higher fraud rates could deter some merchants from expanding into this high-growth sector.

Chargebacks only part of the picture

CyberSource has historically asked merchants to estimate the percent of orders they accept that later turn out to be fraudulent, including those orders consumers charged back through the banking system as well as any direct credits or reversals they issue. According to merchants in 2007, formal fraud chargebacks only represented about 44% of the fraud they experienced. 56% were handled by merchants through reversals or credits to the consumer.

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 Ninth Annual CyberSource Fraud Survey was commissioned by CyberSource Corporation and conducted by Mindwave Research. The survey was fielded September 13th through October 1, 2007 and yielded 318 qualified and complete responses. The sample was drawn from a database of companies involved in electronic commerce activities. Incentive to respondents included a summary of the research.

About CyberSource

CyberSource Corporation (NASDAQ: CYBS) is a leading provider of electronic payment and risk management solutions. CyberSource solutions enable electronic payment processing for Web, call center, and POS environments. CyberSource also offers industry leading risk management solutions for merchants accepting card-not-present transactions. CyberSource Professional Services designs, integrates, and optimizes commerce transaction processing systems. Approximately 217,000 businesses use CyberSource solutions, including half the companies comprising the Dow Jones Industrial Average. 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 including Bellevue, Washington and American Fork, Utah. For more information, please visit CyberSource's web site at www.cybersource.com or email info@cybersource.com.

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