March 26, 2012
Is the Internet the world's largest crime scene?
"If the Internet is a place, it's probably the world's largest crime scene," said Peter Liske, vice president of product management at Threatmetrix. Listening to Peter talk recently at the 1st annual CARTES in North America conference, I immediately visualized my computer screen filled with chalked outlines of bodies representing victims of online crimes. While crime on the Internet can take on many forms, I am focusing today's blog on online shopping fraud. According to CyberSource's 2012 Online Fraud Report, merchants lost an estimated $3.4 billion in 2011 due to fraud taking place in "the world's largest crime scene."
Although $3.4 billion in losses is nothing to smile about, the report offers some good news in the merchants' ongoing battle against cybercriminals. Most notably, merchants are proving that when technology and other fraud detection tools are implemented effectively, fraud can be reduced. In 2011, merchants reported that 0.6 percent of orders were lost to fraud, a 33 percent decrease from 2010. A key reason for this decline of orders lost to fraud appears to be increased investment or usage of tools by the merchants to identify, track, and prevent fraud. In 2011, merchants used more technology and other tools to automatically detect fraud. They also engaged in more manual reviews of orders. In fact, during 2011, the largest merchants (annual online revenue of over $25 million) used more automated fraud detection tools than did smaller merchants, resulting in substantially lower fraud rates for the largest merchants.
Unfortunately, these fraud detection tools come with a cost, and the manual review of transactions is both an expensive and laborious task. According to the CyberSource report, 75 percent of the merchants surveyed do not plan to increase staffing levels related to fraud management in 2012. Further, 78 percent of the merchants expect to make no increase to their fraud management budgets in 2012.
As sales volume on the Internet continues to grow, merchants will have the difficult task of fighting fraud with their limited resources. To keep battling in "the world's largest crime scene," it will be imperative for them to optimize their automated fraud detection tools in today's constrained environment. As merchants engage in this tight-wire act between fraud losses and prevention costs, will they continue to be able to lower the incidents of fraud?
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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