[February 7th, 2001]

See Also   Why You Need an Add URL Page   A Tale Of Two Sites   Don't Duplicate...Differentiate!   The Continuing Battle Against Online Fraud   Taking Care of the Pennies   How To Recession-Proof Your Business   Your Fulfillment Choices   The Silent Thief - How to Get Rid of TopText   A Checklist for Accepting Credit Cards Online   Five Questions That Will Help YOU Succeed Online   Back To "E" Basics   Beyond SET: Enhanced Security for Online Transactions   Just How Serious is Online Fraud?   Your Direct Channel to Customer Service   Online Customer Service: Best (and Worst) Practices   How to Survive the Dot.Com Shakeout   Step-by-Step to Your Own Profitable Web Business   Where Do Average People Find Business Success?   What's REALLY Required To Start An Online Home Business?   CRM in SmallBiz: Disappointing Misconceptions

As promised, this month I'm going to be focusing on online fraud. However, whereas most articles on this subject deal with merchants defrauding customers, I intend focusing on the problem of customers defrauding merchants, particularly through the fraudulent use of credit cards online.

Later in the series I'll be looking at ways you can reduce the risk of being the victim of online fraud as well as taking a look at some current and future technologies that can help you. However, this week I want to start by trying to understand just how widespread a problem online fraud is and what the costs and risks are to a typical e-tailer.

Unfortunately, this is not as easy a task as you might imagine, for although there are many statistics published on the size of the fraud problem, none of them are what I would regard as being “official” i.e. I have yet to come across a formal statement from any of the major credit card companies detailing exactly how bad the problem is.

However, it is possible to piece together an overall picture from some readily available snippets of data.

What are the chances of getting stung?

If you have been selling or shopping online for a while now and have been lucky enough not to have experienced any fraud, you might be tempted to underestimate the risk. In that case, these statistics should wake you up:

• New research by the Gartner Group (E-Commerce Times, 10/11/00) predicts half of small to mid-sized businesses implementing their own computer security measures will fall prey to cybercrime within the next two years.

• 83% of e-tailers believed online fraud to be a serious problem, according to the CyberSource Fraud 2000 Survey.

What are the potential cost impacts for my business?

Early last year, Expedia, Microsoft's online travel affiliate, announced that it was to record a fiscal third-quarter charge of $4 million to $6 million to cover the cost of fraudulent transactions on its Web site arising from the use of stolen credit cards to make travel reservations. Now, I suspect it's unlikely that anyone reading this article is likely to face costs on this scale, but nevertheless the costs of fraud can be enormous even for small businesses:

• A Gartner survey of more than 160 companies revealed that 12 times more fraud exists on Internet transactions and that e-tailers are paying credit card discount rates that are 66 percent higher than traditional retailer fees.

• The CyberSource Fraud 2000 Survey revealed that the average percentage of revenue lost to online fraud was around 4%.

However, whilst these figures are frightening enough, the true cost of online fraud to e-tailers is much, much higher. Again, according to the CyberSource Fraud 2000 Survey “…when (e-tailers were) asked to assess significant negative business impacts related to fraud, 29% mentioned the loss of customer goodwill, 23% chargebacks, 22% loss of staff time, 18% loss of revenue, 12% loss of goods, and 8% bank fees.

Putting these figures together can produce a truly frightening picture. If 4% of revenue is lost to fraud and this were only to represent 18% of the total costs involved, then the actual cost to e-tailers of online fraud could be as high as 22% of revenue!

So what's the bottom line?

While the cost of fraud could be enough in itself to cause your e-business to join the lengthening list of dot.com fatalities, there is another serious risk: if chargeback levels in your Web store become too high then you could lose your merchant account. And quite simply, if you cannot accept credit cards in your Web store your chances of surviving are very slim indeed.

Of course, the key phrase above is “too high” - but just how high is “too high?” I have seen quoted several times a statement that Visa and MasterCard were placing “enormous pressure” on their Internet merchants to keep chargeback levels at less than 1%. However, I have not been able to verify that this is indeed a formal business practice by the major credit card companies.

Even so, the available data would suggest that many e-tailers would struggle to keep chargeback levels beneath this ceiling:

• According to an Unterberg Towbin study in 1998, more than 50 percent of disputed (or potentially fraudulent) charges at the Visa European division came from Internet transactions. However, 'Net transactions represented only 2 percent of the division's total transaction volume.

• A recent Gartner study stated that e-tailers typically incur online chargeback rates of 2.64%, with fraudulent or stolen credit cards accounting for 1.13% of this total

• And the CyberSource Fraud 2000 Survey revealed that approximately 4% of total transactions over their system are fraudulent, but that this figure ranged from 0% to 40%.

I accept that the above does paint a rather bleak picture. Fortunately though, there are many precautions that you can take to reduce your risk of suffering serious online fraud. And that is what I will be looking at over the remainder of this series.

Next: Beyond SET: Enhanced Security for Online Transactions

Links
Gartner		http://www.gartner.com
CyberSource Fraud 2000 Survey		http://cybersource.com/fraud_survey/