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Online fraud costs $2.6 billion this year

High fraud rates continue to plague electronic commerce Web sites, with criminals expected to steal $2.6 billion from Net merchants this year, according to a new survey.

High fraud rates continue to plague electronic commerce Web sites, with criminals expected to steal $2.6 billion from online merchants this year, according to a new survey.

While that's an annual increase of $700 million, the percent increase is roughly equal to the increase in total Net sales, so rates of fraud stayed essentially the same -- about 2 percent of sales -- according to the survey, conducted by CyberSource Corp.

But the persistent fraud adds hidden costs for merchants, and ultimately, consumers. 

Suspicious merchants are now rejecting a far higher percentage of orders, meaning a steep increase in lost sales due to accidental rejection of legitimate orders. Nearly 6 percent of all orders are now rejected, the survey found, up from about 4.5 percent last year. 

"That's leaving revenue on the table," said Doug Schwegman, director of market intelligence at CyberSource.  Making matters worse, more merchants are manually reviewing orders, Schwegman said, adding to the cost of doing business. "The Internet was supposed to be automated. You don't want to keep adding costs."

International fraud rates also remain high, limiting the the global reach of many Web businesses. Nearly 13 percent of all orders originating from overseas are rejected by U.S. merchants.  And even with that high rejection rate, orders that are processed still have a 4 percent fraud rate, the survey found.

But Daniele Micci-Barreca, senior director of fraud solutions at ClearCommerce Corp, said the picture may not be as bleak as the survey suggests. High incidence of fraud at individual merchants can really skew averages, he said, making the overall fraud rate a misleading statistic.

"Be careful in looking at averages," he said.  "In our experience if you take a typical sample of online merchants, the reality is that there is a small set of merchants that account for most fraud losses. ... There are still a significant number of merchants that have very big problems."

Still, even if fraud rates remain flat, Gartner analyst Avivah Litan says that's a bad sign for electronic merchants, and for electronic commerce.

"In general, with all the money being spent fighting online fraud, the rates should be going down. The fact that they have merely stabilized is not good news," she said. 

Smaller merchants feel the pinch
Automated tools designed to help merchants don't seem to be helping either, she said. "There are too many false positives, which is why merchants are increasingly having to review orders manually," she said.  "This proves that the crooks have gotten way ahead of the fraud detection systems that are out there."

Statistics also show that medium-sized merchants continue to be hardest hit by fraud, while larger merchants are doing better at protecting themselves, according to CyberSource.

Merchants with sales of between $500,000 and $5 million reject more orders, but still face more fraud anyway, the survey found. Fraud rates at sites with sales of greater than $25 million are half that of fraud at the smaller sites, while rejection rates are about 50 percent lower.

That concerns Litan, who assumes it means that many smaller merchants simply can't afford expensive fraud protection software, or what they are buying isn't working.

"The Internet was supposed to provide a level playing field providing equal opportunity for all types of merchants," she said.  "But the smaller e-tailers are losing out on two ends: From a fraud point of view, the big guys have an advantage because they have more resources to spend fighting fraud. And from the consumer point of view, increasingly suspicious consumers -- many of whom experience phishing attacks and other online scams -- are less likely to shop at unknown brands and sites."