Holiday Fraud May Cost Nearly $300 Million

By Beth Cox

A new industry report on the persistent fraud problem that dogs e-commerce merchants, from the giants like down to mom-and-pop storefronts, predicts that crooks and deadbeats will create losses of an estimated $285 million over the holiday season in the United States.

The good news is that fully two-thirds of U.S. merchants are taking more online fraud precautions this year than they did in 2001, according to the fourth annual CyberSource Fraud Survey.

The bad news is that 29 percent of survey respondents believe they will experience more credit card fraud this holiday season than they did last year.

In fact, fraud is expected to siphon off 3 percent of overall online sales in 2002, the survey said. Even a company the size of, which surely has abundant resources and ample motivation to fight fraud, gets taken now and again.

An Amazon exec said in a conference call with analysts recently that the fraud rate at the company is running about 2.5 percent.

The percentage may seem small, but as online sales increase the dollar amounts become more and more significant. And online holiday sales are up – and online retailer association reported this week that during the first two weeks of November, 60 percent of Internet retailers posted revenue increases of 25 percent or greater compared to the same period last year.

The CyberSource (NASDAQ:CYBS) survey found that 71 percent of merchants say they plan to use AVS, a means of ensuring an address supplied with the order matches the address attached to the buyer’s credit card, compared to 46 percent the year before.

And to battle identity theft, 59 percent of merchants say they are now encrypting stored credit card numbers, an increase of 11 percentage points over last year’s 48 percent.

Penetration audits – checks to determine if a site has been hacked – have nearly doubled since last year, and nearly half of the survey respondents now report having a paid risk management employee responsible for battling online credit card fraud, CyberSource said.

Interestingly, the survey audience said that 20 percent of their orders still require human intervention to screen for fraud. That of course is costly, and helps to explain why the survey found that more merchants will be adopting verification services like Verified by Visa and Mastercard SecureCode.

The percent of respondents rating online credit card fraud as a “Serious” or “Very Serious” business issue fell to 46 percent this year from 59 percent in 2001. The survey was done for CyberSource by Austin, Texas-based Mindwave Research. The survey was fielded October 2-9, 2002 and yielded 341 complete responses (vs. 220 the year before). The sample was drawn from a database of companies involved in electronic commerce activities.

Mountain View, Calif.-based CyberSource provides electronic payment and risk management solutions for online, call center/IVR, and POS environments.

Small Business Computing Staff
Small Business Computing Staff
Small Business Computing addresses the technology needs of small businesses, which are defined as businesses with fewer than 500 employees and/or less than $7 million in annual sales.

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