Although the overall rate of fraud loss remains relatively constant at 1.6 percent of total revenue, mid-to-large merchants are "taking a pounding," said the 7th Annual CyberSource Fraud Survey.
After several years of flat or declining fraud loss rates, mid-to-large merchants reported a reversal of that trend in 2005, according to the survey. For mid-sized merchants selling $5 to $25 million online, average fraud losses increased from 1.5 percent of revenue in 2004 to 1.8 percent in 2005. Large online merchants selling over $25 million reported a slight increase from 1.1 percent to 1.2 percent of revenue.
The key problem facing larger merchants as they work to fight online fraud is the increasing volume of orders they must process each year combined with their reliance on time-consuming, labor intensive, manual review processes. Mid-sized merchants in the survey reported manually reviewing one-quarter of their orders this year, up from 21 percent in 2004. They did this with essentially the same staff levels as the year before. Forcing more orders through an already cumbersome manual review process is having a predictable impact - the percentage of orders accepted that ultimately turned out to be fraudulent went up in 2005 from 1.3 precent to 1.7 percent for mid-sized merchants.
"Merchants used to be able to just throw people at this problem," said Doug Schwegman, director of market and customer intelligence for CyberSource.
"But there's an inherent limitation to that solution. What merchants need today is greater efficiency, greater intelligence, even technology breakthroughs. The bad guys have put the larger merchants in a challenging situation."
The rate of manual review for the largest merchants did not grow from 2004 to 2005, holding at 15 percent both years, while their fraudulent order rate drifted up from 0.9 percent to 1.1 percent.
"That does not translate to success for this class of merchants," added Schwegman. "The larger merchant needs to see this review rate drop every year, while driving fraudulent orders significantly below 1 percent. Reviewing 15 percent of orders is far too high when you consider the exploding volumes of the largest online merchants."