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From cybersource.com:

Managing online fraud continues to be a significant and
growing cost for merchants of all sizes. To better understand
the impact of payment fraud for online merchants,
CyberSource sponsors annual surveys addressing the
detection, prevention and management of online fraud. This
report summarizes findings from our ninth annual survey.

Overview

Over the past few years the percent of online revenues lost
to payment fraud has been slowly declining from 1.8%
in 2004 to 1.4% this year. However, total losses from
online payment fraud in the U.S. and Canada have steadily
increased during this time as eCommerce has continued to
grow 20% or more each year.1 In 2007, we estimate that
$3.6 billion in online revenues will be lost to online fraud
— up from $3.1 billion in 2006.

Key Fraud Metrics

The percent of accepted orders which are later determined
to be fraudulent increased slightly. In 2007 the survey
shows the overall average fraudulent order rate was 1.3%
vs. 1.1% in 2006. The share of incoming orders merchants
decline to accept due to suspicion of payment fraud was
also up slightly. In 2007 the overall order rejection rate
due to suspicion of fraud was 4.2% compared to 4.1%

in 2006. Some merchants of similar online revenue size
selling similar goods online have order rejection rates
significantly below 4% while still maintaining low fraud
rates. Therefore, we believe that merchants with order
rejection rates near or above the 4.2% rate are rejecting a
significant number of valid orders.

Chargebacks Understate Fraud Loss
by as Much as 50%

This year’s survey again probed the percent of fraud losses
accounted for by chargebacks versus those incurred as a
result of merchants issuing credit to reverse a charge in
response to a consumer’s claim of fraudulent account use.
Overall, merchants continue to report that chargebacks
accounted for less than half of fraud losses.

International Order Risk 2 ½ Times Higher
Than Domestic Orders

On average, merchants say the rate offraud associated
with international orders is over two-and-one-half times
as high as domestic orders. Merchants also reject international
orders at a rate two-and-one-half times higher than domestic orders.

Manual Review Rates Increase

After declining in 2006, manual review rates moved back
towards levels recorded in 2004 – 2005. Manual review
rates increased from an average of 23% of orders in 2006
to 27%. Overall, 82% of merchants are engaging in manual
order review. These merchants on average are reviewing
one out of every three orders. Large online merchants, who
typically employ more automation, continue to have much
lower manual review rates. In 2007 large online merchants
($25+M in online sales) reported a small drop in manual
review rates from 15% to 14%. However, for many large
merchants the drop in manual review rates did not offset
their growth in online orders so it is likely that they are
reviewing more orders. Survey data indicates that, in total,
online merchants increased their spending on manual
review staff in 2007 by as much as $100 million.

Efficiency Gains of As Much As 20%
May Be Required

As online eCommerce sales continue to grow 15% to 20%
per year, merchants face the growing problem of screening
more online orders. Continued reliance on manual review
presents a serious challenge to scalability. Can merchants
grow their review staffing sufficiently to keep pace with
fraud? Only 20% of online merchants report having budget
to increase manual review staff in 2008 to cope with
higher order volumes. Therefore, each year, merchants
must increase fraud management efficiency approximately
20% just to keep pace.

Total Pipeline View

Businesses that focus solely on managing chargebacks
may not be seeing the complete financial picture. Online
payment fraud impacts profits from online sales in multiple
ways. Besides direct revenue losses plus the cost of stolen
goods/services and associated delivery/fulfillment costs,
there are the additional costs of rejecting valid orders,
staffing manual review teams, administration of fraud
claims, as well as challenges associated with business
scalability. Merchants can gain efficiency by taking a total
pipeline view of operations and costs. While the fraud rate
is one metric to monitor (and contain within industry and
association limits), an end-to-end view is required to arrive
at the best possible financial outcome.
In 2007, these “profit leaks” in the Risk Management
Pipeline™ impact as much as 47+% of orders for medium
merchants and as much as 19+% of orders for larger
merchants—restricting profits, operating efficiency and
scalability. This report details key metrics and practices at
each point in the pipeline to provide you with benchmarks
and, hopefully, insight. Custom views of these benchmarks
and practices are available through CyberSource—see end
of report for contact information.


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