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Study: Online Fraud Rate Rises For Midsize, Large Retailers

Companies are failing to hire security staff to keep up with growing online business.
Losses from online fraud has increased this year among large and midsize retailers, a result of many companies failing to increase order-checking staff as the amount of products sold online increases, a security firm said Wednesday.

Overall, fraudsters are expected to take $2.8 billion from online retailers this year, an increase of 8 percent over 2004, according to an annual merchant survey conducted by Mindwave Research for CyberSource Corp.

The overall rate of fraud loss remained relatively constant at 1.6 percent of revenue, but while small retailers saw their rate drop, larger merchants experienced an increase. Retailers selling $5 million to $25 million in goods saw damages rise to 1.8 percent from 1.5 percent a year ago. Those selling more than $25 million experienced an increase to 1.2 percent from 1.1 percent.

"Merchants with higher order volumes are the ones that are really challenged," Doug Schwegman, director of market and customer intelligence for Mountain View, Calif.-based, CyberSource, said.

The number of fraud hunters at larger corporations have remained about the same, as online sales has increased, Schwegman said. As a result, a smaller percentage of suspicious orders are being reviewed manually.

"The order volume has grown, but they haven't been able to add a lot of staff, so the fraud rate is going up," Schwegman said.

Indeed, online holiday sales alone are expected to reach $26 billion this year, an increase of 18 percent over last year, according to JupiterResearch. Rival Forrester Research predicts a 25 percent increase to $18 billion. Analyst projections can vary widely, depending on the methodology used.

Overall online sales this year are projected to reach $79 billion, up from $66 billion in 2004, according to JupiterResearch. That amounts to 4 percent of the $1.9 trillion U.S. consumers are expected to spend this year.

The increase in fraud rate comes despite the use of more fraud screening tools by larger companies. On average, smaller merchants use about half the number of tools as midsize and large retailers, the survey found. The latter are also twice as likely to install automated systems.

Despite the decline among smaller retailers, merchants with online revenues of less than $5 million tend to have higher fraud rates. This year, the rate was 1.6 percent of revenue, a drop from 2.1 percent last year, and the percentage of fraudulent orders overall fall to 0.9 percent from 1.4 percent.

Other findings included a high percentage of international orders that are accepted and later found to be fraudulent. That number was 2.4 percent versus 1 percent of all orders. In addition, 12.4 percent of orders outside the United States and Canada are rejected on suspicion of fraud versus the overall rejection rate of 3.9 percent.

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