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Fraud Chewing E-Commerce Profits

Fraud will eat a $2.8 billion chunk out of e-commerce revenue in 2005, according to a new study.

The seventh annual fraud survey showed scams siphoning off $200 million more than it did in 2004, an 8 percent increase in ill-gotten gains. The survey of 404 e-commerce operations was sponsored by CyberSource, a provider of electronic payment and risk management systems.

Mid-tier to large merchants fared worse. E-tailers selling from $5 to $25 million annually online saw their fraud losses increase from 1.5 percent to 1.8 percent of revenue.

Those selling more than $25 million worth of goods saw an increase in losses from 1.1 percent to 1.2 percent of revenue. Only online merchants with revenues below $5 million got a break from last year.

Orders from outside North America tended to be riskier: Around 2.4 percent of fulfilled international orders turn out to be fraudulent, as opposed to the overall rate of 1 percent. Merchants that accept international orders said they declined 12.4 percent of them on suspicion, over three times the overall rejection rate of 3.9 percent.

The larger companies tended to use more technology to fight back. On average, mid-to-large sized merchants used six software or services to verify orders, while smaller merchants used an average of 3.5 such tools. The larger merchants are also twice as likely to install automated "decisioning" systems.

A full 75 percent of survey respondents used an address verification system, which automatically compares the address on file with the credit card issuer to the billing address provided by the cardholder. More than half the merchants (66 percent) asked for the card verification number printed on the back of the card. Over half the merchants said they are currently using or intend to implement MasterCard's SecureCode or Visa's Verified by Visa payer authentication systems by the end of next year.

While all merchants in the survey review at least some orders manually, that system is breaking down as e-commerce volume grows.

Mid-sized merchants in the survey reported manually reviewing one-quarter of their orders in 2005, up from 21 percent in 2004; the increase in reviews was accomplished without increasing staff. The rate of manual review for the largest merchants held steady year to year at 15 percent, while the proportion of bad orders grew from 0.9 percent to 1.1 percent.