Online Payment Fraud Trends

,
Merchant Practices & Benchmarks

2007 Edition
8
th
Annual
ONLINE FRAUD REPORT


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C Y B E R S O U R C E 8
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A N N U A L O N L I N E F R A U D R E P O R T
Report & Survey Methodology
This report is based on a survey of 351 online merchants. Decision
makers who participated in this survey represent a blend of small,
medium and large-sized organizations based in North America. Merchant
experience levels range from companies in their first year of online
transactions to the largest e-retailers and digital distribution entities
in the world with many years of experience. Merchants participating
in the 2006 survey reported a total estimate of $53 billion dollars
for their 2006 online sales. Survey respondents include both non-
CyberSource and CyberSource merchants. The survey was conducted
via online questionnaire by Mindwave Research. Three hundred and
fifty-one organizations completed the survey between September 14th
and October 6th, 2006. All participants were either responsible for or
influenced decisions regarding risk management in their companies.
Summary of Participants’ Profiles
Online Fraud Survey Wave 2002 2003 2004 2005 2006
Total number of merchants participating 341 333 348 404 351
Annual Online Revenue
Less than $500K 28% 29% 34% 50% 37%
$500K to Less than $10M 44% 43% 39% 24% 30%
Over $10M 28% 28% 27% 26% 33%
Duration of Online Selling
Less than One Year 12% 10% 12% 14% 11%
1-2 Years 28% 19% 14% 19% 11%
3-4 Years 45% 44% 30% 23% 18%
5 or More Years 15% 27% 44% 45% 61%
Risk Management Responsibility
Ultimately Responsible 32% 49% 50% 60% 54%
Influence Decision 68% 51% 50% 40% 46%
Get Tailored Views of Risk Management Pipeline

Metrics
A summary of CyberSource’s full pipeline process analysis is provided in the Appendix of this report. To get a view crafted for your
company’s size and industry, please contact CyberSource at 1.888.330.2300 or online at www.cybersource.com/contact_us.
For additional information, whitepapers and webinars, or sales assistance:
• Contact CyberSource: 1.888.330.2300 or www.cybersource.com/contact_us
• Risk Management Solutions: visit www.cybersource.com/risksolutions
• Global Payment & Security Solutions: visit www.cybersource.com/products_and_services/global_payments
Table of Contents
EXECUTIVE SUMMARY ....................................................................... 3
STAGE 1: AUTOMATED SCREENING.................................................... 5
Fraud Detection Tools ................................................................... 5
Planned 2006 Fraud Tool Use ....................................................... 7
Automated Decision/Rules Systems.............................................. 7
STAGE 2: MANUAL REVIEW ................................................................ 8
Manual Order Review Rates ......................................................... 8
Manual Order Review Efficiency ................................................... 9
Actions Taken During Review ........................................................ 9
Final Order Disposition ................................................................. 9
STAGE 3: ORDER DISPOSITIONING (ACCEPT/REJECT) ..................... 10
Post-Review Order Acceptance Rates ......................................... 10
Overall Order Rejection Rates ..................................................... 11
STAGE 4: FRAUD CLAIM MANAGEMENT ........................................... 12
Fighting Chargebacks ................................................................ 12
Chargeback Management Tools .................................................. 13
Chargebacks—Only Half the Problem ........................................ 13
Fraud Rate Metrics ..................................................................... 14
TUNING & MANAGEMENT ................................................................. 16
Maintaining and Tuning Screening Rules ................................... 16
Merchant Budgets for Fraud Management ................................. 17
Budget Allocation ....................................................................... 17
APPENDIX ....................................................................................... 18
Sample Risk Management Pipeline Metrics ................................ 18
RESOURCES & SOLUTIONS ............................................................. 19
CyberSource Payment Management Solutions ............................ 19
ABOUT CYBERSOURCE .................................................................... 20
For More Information .................................................................. 20
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C Y B E R S O U R C E 8
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3 ©2007 CyberSource Corporation. All rights reserved.
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 eighth 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% measured 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 2006, we
estimate that $3.0 billion in online revenues was lost to
online fraud — up from $2.8 billion in 2005.
Key Fraud Metrics
The percent of accepted orders which are later determined
to be fraudulent remained relatively stable. In 2006 the
survey shows the overall fraudulent order rate was 1.1% vs
1.0% in 2005. The share of incoming orders merchants
declined to accept due to suspicion of payment fraud was
up slightly. In 2006 the overall order rejection rate was
4.1% compared to 3.9% in 2005. If only 20% of these
turned out to be valid, then as much as another $1.6
billion may have been lost—most likely to competitors.
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 in response to
a consumer’s claim of fraudulent account use. Overall,
merchants continued 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 of fraud associated
with international orders is two-and-one-half times as high
as domestic orders. Merchants also reject international
orders at a rate three times higher than domestic orders.
These are the same ratios we found in last year’s survey.
Executive Summary
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U.S. Census Bureau Retail E-Commerce Sales reports, Forrester Research.
4
C Y B E R S O U R C E 8
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A N N U A L O N L I N E F R A U D R E P O R T
Manual Review Rates Fall
After reaching a plateau in 2005, manual review rates
experienced their first significant decline in 2006. After
steadily increasing from 2000 to 2004, manual review
rates declined from 26% of orders in 2005 to 23% of
total orders in 2006. Overall, 81% of merchants are
engaging in manual order review. Merchants who see
less than $5 million in annual online orders have the
highest review rate (average 36% of orders). On average,
medium and large merchants (merchants selling more
than $5 million online) review 15-25% of orders and
seek productivity gains through automation. Medium and
large merchants tend to employ two times the number of
screening tools as compared to smaller merchants and are
two times as likely to utilize automated decision systems.
Efficiency Gains of As Much As 20%
May Be Required
As online eCommerce sales continue to grow 20% or
more per year, larger merchants face the growing problem
of screening more online orders. Continued reliance on
manual review presents a serious challenge to scalability.
Only 24% of larger online merchants report having budget
to increase manual review staff in 2007 to cope with higher
order volumes. Therefore, each year, larger 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, 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 2006, these “profit leaks” in the Risk Management
Pipeline™ impacted as much as 30+% of orders for
medium merchants and as much as 20+% 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.
Automated
Screening
1
Manual
Review
2
Accept
Reject
3
Fraud Claim
Management
4
Risk Management Pipeline

ORDER
RETAINED
REVENUE
(PROFIT)
Tuning and Management
Automated
Screening
Fraud Claim
Management
Manual
Review
Accept
Reject
PROFIT LEAKS
Staffing &
Scalability
Lost
Sales
Fraud Loss &
Administration
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A N N U A L O N L I N E F R A U D R E P O R T
5 ©2007 CyberSource Corporation. All rights reserved.
Stage 1: Automated Screening
Fraud Detection Tools
We define detection tools as those used to identify the
probability of risk associated with a transaction or to validate
the identity of the purchaser. Results of tests carried out
by detection tools are then interpreted by humans or rules
systems to determine if a transaction should be accepted,
rejected or reviewed. A wide variety of tools are available
to help merchants evaluate incoming orders for potential
fraud. In 2006, over two-thirds of merchants reported using
three or more fraud detection tools, with 4.8 tools being the
average. Larger merchants dealing with higher order volumes
reported using seven tools, on average.
The most popular tools
used to assess online fraud
risk are shown in chart #3
(see page 6) which shows
the current and planned
adoption of different tools.
Note that the tool usage
profile for merchants over
$25M in online sales is
different than the overall
average. These larger
merchants use more
company-specific risk
scoring models, negative
and positive lists, and
sophisticated order velocity
monitoring tools.
The use of basic fraud
detection tools has
continued to increase in
2006. The tool most often
mentioned by merchants
is the Address Verification
Service (AVS) which compares numeric address data with
information on file from the cardholder’s card issuing
bank. AVS is generally available for US cardholders and for
limited numbers of cardholders in Canada and the UK.
AVS is subject to a significant rate of “false positives”
which may lead to rejecting valid orders as well as missing
fraudulent orders. If the cardholder has a new address or a
valid alternate address (such as seasonal vacation home),
this information may not be reflected in the records of the
cardholder’s issuing bank, so the address would be flagged
as invalid. Merchants typically do not rely solely on the AVS
result to accept or reject an order.
Automated
Screening
1
Manual
Review
2
Accept
Reject
3
Fraud Claim
Management
4 ORDER
RETAINED
REVENUE
Tuning and Management
0 3–4 1–2 5–9 10+
Average Number of
Fraud Detection Tools Used
(all merchants)
Number of Tools Used
Mean
2006 = 4.8
3
%
2
5
%
3
7
%
1
0
%
2
5
%
<$500K $5M–
<$25M
$500K–
<$5M
$25M–
<$100M
$100M+
n=351
Average Number of
Fraud Detection Tools Used
(by merchant size)
Annual Online Revenue
4
.
3
3
.
5
6
.
7
7
.
7
4
.
9
2
6
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Card Verification Number (CVN; also known as CVV2 for
Visa, CVC2 for MasterCard, CID for American Express and
Discover) is the second most commonly used detection
tool. The purpose of CVN in a card-not-present transaction
is to attempt to verify that the person placing the order has
the actual card in his or her possession. Requesting the
card verification number during an online purchase can
add a measure of security to the transaction. However, CVN
numbers can be obtained by fraudsters just as credit card
numbers are obtained. CVN usage by online merchants
has continued to increase, rising from 44% of online
merchants using this tool in 2003 to 69% today.
Most fraud management tools experienced an increase in
adoption in 2006 with IP geolocation, company specific
fraud screens and order velocity monitoring showing the
highest increases in adoption (all up by 10 pts). Interesting
and emerging fraud tools this year include in/out of
wallet challenges (where online buyers are asked specific
background questions during the online order process) and
device fingerprinting (which examines and records details
about the configuration of the internet device the order is
being placed from). Both of these are in their infancy with
adoption rates of less than 10% of merchants surveyed.
Current & Planned Fraud Detection Tool Usage
All Merchants n=351 Merchants $25M+ n=86
Address Verification Services (AVS) 79% 6%
Card Verfication Number 69% 12%
Fraud Screen – Company Specific 38% 6%
Address Point Verification 37% 11%
IP Geolocation Information 35% 8%
Negative Lists 34% 5%
Order Velocity Monitoring 33% 8%
Automated Decision / Order Screening 32% 8%
Verified by Visa, MasterCard SecureCode 29% 16%
Fraud Screen – General Industry Models 26% 8%
External Passive Verification 25% 6%
Positive Lists 21% 6%
Customer Device “Fingerprinting” 3%: 4%
Out-of-Wallet or In-Wallet Challenge 5%: 3%
Chargeback Management / Representment Tools 22% 10%
Electronic Case Management System 9%: 7%
Current 2006
Planning New Implementation 2007
92% 2%
77% 14%
74% 5%
34% 13%
59% 13%
72% 5%
66% 15%
55% 12%
30% 19%
41% 7%
50% 7%
47% 10%
24% 13%
43% 10%
3%: 5%
7%: 1%
3
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C Y B E R S O U R C E 8
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A N N U A L O N L I N E F R A U D R E P O R T
7 ©2007 CyberSource Corporation. All rights reserved.
Planned 2007 Fraud Tool Use
Payer Authentication Services Cited As Tool Most Often
Planned For Implementation in 2007
Card association payer authentication services (e.g. Verified
by Visa, MasterCard SecureCode) figure prominently in
many merchants’ future plans. Over the last few years,
survey data indicates a steady increase in the adoption of
payer authentication systems, rising from 19% in 2003 to
29% in 2006. 16% of respondents say they are interested
in deploying these systems in 2007 as a new tool to
detect and manage fraud. Implementing these systems
should reduce exposure to card-not-present fraud loss
either by authenticating the buyer’s identity or by shifting
fraud liability back to the card issuing bank (interchange
incentives also apply). But, if merchants have a sufficiently
high direct fraud loss rate, the card association may not
permit the merchant to shift liability even if the merchant
has implemented a payer authentication system. Over
the next few years, these systems may help reduce the
incidence of online credit card fraud if a critical mass
of consumers register their cards and accept the new
checkout procedures. Merchants will still need to have
procedures in place to handle customers who have not
adopted the new systems or who use cards which are not
yet supported. The growing popularity of online payment
types such as electronic checks, PayPal, Bill Me Later, etc.
will also require different fraud management techniques.
Automated Decision/Rules Systems
Automated Order Screening
Automated order decisioning / screening is now used by
32% of merchants (up from 25% in 2005). Over 50%
of the larger online merchants use them. These tools
help companies automate order screening by applying a
merchant’s business rules in the real-time evaluation of
incoming orders. In the current survey, 8% of merchants
say they plan to add this capability in 2007. 12% of
larger merchants (more than $25 million in annual online
revenues) say they will add order decisioning systems,
consistent with their need for increased automation.
Decision and rules systems automate the evaluation of test
results generated by fraud detection tools and determine
whether the transaction should be accepted, rejected, or
suspended for review. As the use of tools
grows, it is becoming increasingly important
for merchants to employ automated systems
to interpret and weigh the multiple results
for each product or transaction profile
(versus a “one size fits all” screen) to
optimize business results. Because fraud
patterns are dynamic, and the introduction
of new products or services often requires
a unique set of acceptance rules, it is
imperative that these systems can also
quickly adapt to the changing environment.
Results of Automated Screening
The automated order screening process
generates three outcomes: 1) order
acceptance without further review, 2) orders
flagged for further review and 3) automatic
order rejection. In our experience, most
merchants avoid automatic rejection of
orders and instead send all orders marked
for review or reject into a manual review
queue for further validation.
All $5M
– <
$25M $500K
– <
$5M $25M
+
Automated Decision / Order Screening
System Utilization
(by merchant size)
Annual Online Revenue
2005 n=404
2006 n=351
32% Overall
Up from 25%
2
5
%
3
2
%
2
3
%
2
7
%
4
3
%
5
5
%
3
5
%
4
0
%
4
8
C Y B E R S O U R C E 8
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A N N U A L O N L I N E F R A U D R E P O R T
Orders which do not pass the automated order screening
stage typically enter a manual review queue. During this
stage, additional information is collected about the order
to determine if it should be accepted or rejected due to
excessive fraud risk.
Manual review represents a critical area of profit leakage.
It is expensive, limits scalability and impacts customer
satisfaction. Few merchants say they have budget available
to increase review staff now or in the next twelve months.
Even at a stable percent of orders sent to review, the total
number of orders that must be reviewed increases in step
with total online sales increases.
Manual Order Review Rates
In what should be a highly automated sales environment,
81% of merchants are manually checking orders today.
Their average rate of manual review exceeds 1 out of 4
orders. Projecting this rate across all merchants and orders,
approximately 23% of all online orders (about one in four)
were reviewed in 2006, as compared to 16% in 2000
(approximately one in six orders).
Merchants of all sizes use manual review to manage
payment fraud. Chart #6 (see page 9) shows smaller
merchants review a higher percentage of orders (perhaps
because lower order volumes permit such practice) but
Stage 2: Manual Review
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Automated
Screening
1
Manual
Review
2
Accept
Reject
3
Fraud Claim
Management
4 ORDER
RETAINED
REVENUE
Tuning and Management
9
C Y B E R S O U R C E 8
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A N N U A L O N L I N E F R A U D R E P O R T
9 ©2007 CyberSource Corporation. All rights reserved.
even larger merchants review a significant percentage of
online orders—and likely devote more resources to this
task than is operationally scalable.
While the percentage of online orders being manually
reviewed was down in 2006 for those merchants doing
manual review, the volume of online sales is up (according
to most sources) by 20% or more. Virtually all online sales
forecasts continue to project high growth rates over the
next few years. As a result, merchants who manually
review significant portions of orders will need to take at
least one of the following actions: 1) divert more staff time
to the order review process; 2) increase staffing levels;
3) allow more time to process orders and ship good ones;
or 4) improve their methods of identifying riskier orders for
review and make the review process itself more efficient.
Manual Order Review Efficiency
In 2006, survey data shows that 54% of companies review
less than 20 orders per hour, per reviewer. On average,
larger merchants say they review more orders per hour than
smaller merchants. This difference may be attributed to
a higher utilization of case management systems among
larger merchants. 24% of merchants over $25 million
in annual online sales report use of case management
systems, nearly three times the overall rate of 9%.
Actions Taken During Review
Beyond reviewing data associated with the order, additional
review cycles are spent contacting various parties to
validate information—causing drag on review efficiency
and, perhaps most importantly, inconveniencing the
customer. In last year’s survey, merchants reported that
44% of orders reviewed required contacting the customer,
29% required contacting the customer’s bank, and 18% of
the orders required contacting third party data sources such
as credit bureaus. Note that a single order may require
more than one of these actions. Finding ways to eliminate
these actions or to automate review processes offer great
potential for enhancing profitability and scalability.
Final Order Disposition
Automated screening and manual order review ultimately
result in order acceptance or rejection. A relatively high
percentage of orders reviewed are ultimately accepted
(see next section)—highlighting the need for merchants
to improve automated screening and reduce the need for
review. A look at order reject and acceptance rates follows
in Stage 3 of the pipeline review.
35%
15%
5 %
25%
45%
30%
10%
20%
40%
0%
<
$5M $25M
+
$5M
– <
$25M
Manual Review by Merchant Size
(for merchants engaged in review)
2005
2006
4
1
%
3
6
%
2
8
%
2
5
%
1
9
%
1
5
%
%

o
f

O
r
d
e
r
s
6
Median Mean
# Orders Reviewed
Per Hour/Reviewer
# Orders Reviewed
Per Hour/Reviewer
(by Review Rate)
2005
2006
1
0
1
5
2
2
2
9
# Orders % of Merchants
<10 27%
10–19 27%
20–49 26%
50+ 20%
7
10
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
Post-Review Order Acceptance Rates
In 2006, merchants surveyed indicated that they ultimately accepted over two-thirds of the orders they manually reviewed
(see chart #8). Over 40% of merchants report they accept 90% or more of orders they manually review.
Stage 3: Order Dispositioning (Accept/Reject)
Overall $500K – <$5M <$500K $5M – <$25M $25M+
Average % of Manually Reviewed
Orders that are Accepted
Annual Online Revenue
% Accepted
% Rejected n=285
% of Merchants Reporting
this Level of Acceptance
6
6
%
3
4
%
6
6
%
3
4
%
6
4
%
3
6
%
7
0
%
3
0
%
6
4
%
3
6
%
10%
0%
20%
30%
40%
50%
60%
70%
80%
90%
100%
11% 80%
– <
90%
38% 90%
– <
100%
5% 100%
7% 70%
– <
80%
5% 60%
– <
70%
8% 50%
– <
60%
1% 40%
– <
50%
2% 30%
– <
40%
4% 20%
– <
30%
4% 10%
– <
20%
14% 1%
– <
10%
1% Under 1%
8
Automated
Screening
1
Manual
Review
2
Accept
Reject
3
Fraud Claim
Management
4 ORDER
RETAINED
REVENUE
Tuning and Management
11
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A N N U A L O N L I N E F R A U D R E P O R T
11 ©2007 CyberSource Corporation. All rights reserved.
Overall Order Rejection Rates
Order reject rates can reflect true fraud risk or signal
“profit leaks” in terms of valid order rejection or
unnecessarily high rates of manual review. In 2006,
merchants participating in the survey reported a slight
increase in their order rejection rates from 3.9% in 2005
to 4.1%. For every fraudulent order they received they
rejected almost 4 orders due to suspicion of fraud.
Large online merchants, who saw a 0.3% point drop in
their accepted fraud rate, saw a significant increase in
their order rejection rate, which rose from 4.0% in 2005 to
nearly 4.9% in the 2006 survey. From 2005 to 2006, the
largest merchants appear to have avoided one incremental
fraudulent order by rejecting an additional 3 orders. If the
combined total gross margin on the 3 rejected orders was
less than the cost of one fraudulent order (eg. cost of goods
sold + shipping and handling costs) then these merchants
have set their order acceptance criteria and risk thresholds
at an appropriate level. However, to the extent the lost
gross margin on the 3 rejected orders is larger than a single
fraudulent order there may be room for increasing bottom
line profit by further tuning acceptance and risk thresholds
(see our whitepaper “Managing eCommerce Payment
Fraud”). Sophisticated merchants realize it is possible to
“over control” fraud losses at the expense of net gains in
revenues and profits. Effective fraud management involves
careful optimization of all the fraud metrics.
Merchants who accept orders from outside of North
America consistently report a much higher level of
order rejection due to suspicion of payment fraud for
international orders. Again in 2006 merchants report
their rejection rate on these orders is three times higher
than for domestic orders as shown in chart #10 below.
The actual fraud rate experienced on international orders
seems to support this cautious approach; merchants
report the fraud rate on international orders is over twice
that of domestic orders (see chart #18).
6.0%
2.0%
1.0%
4.0%
3.0%
5.0%
0%
Overall $500K – <$5M <$500K $5M – <$25M $25M+
Average % Orders Rejected Due to Suspicion of Fraud
Annual Online Revenue
3
.
9
%
4
.
1
%
3
.
5
%
3
.
5
%
5
.
3
%
4
.
6
%
4
.
0
%
4
.
9
%
3
.
8
%
4
.
1
%
2005 n=290
2006 n=290
9
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12
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
Fighting Chargebacks
This year’s survey also examined practices associated with reviewing and contesting chargebacks (“re-presentment”).
Overall, an average of 53% of fraud-coded chargebacks are re-presented (up from 43% in 2005), with over one-in-three
merchants contesting 90-100% of chargebacks and one-in-four contesting fewer than 10% (see chart below).
Merchants report that they win, on average, 42% of the chargebacks they dispute. These averages translate to an
overall net recovery rate of 22% (meaning 22% of all fraud-coded chargebacks are recovered). However, given the wide
disparity in the chargeback re-presentment rate, when these are calculated on a merchant-by-merchant basis and then
averaged, the re-presentment win rate rises to 32%. So, nearly one out of three fraud chargebacks are recovered upon
re-presentment (see chart #12 on next page). Clearly, having an efficient re-presentment process can help enhance
profitability and reduce fraud loss.
Stage 4: Fraud Claim Management
Overall $500K – <$5M <$500K $5M – <$25M $25M+
Average % Total Fraud-Coded
Chargebacks Re-presented
Annual Online Revenue
2005 n=178
2006 n=161
% of Merchants Reporting
this Level of Re-presentment
10%
0%
20%
30%
40%
50%
60%
70%
80%
90%
100%
4
3
%
5
3
%
3
8
%
4
8
%
4
4
%
5
8
%
5
3
%
5
6
%
4
1
%
5
3
%
7% 80%– <90%
10% 90%– <100%
27% 100%
2% 70%– <80%
6% 60%– <70%
6% 50%– <60%
1% 40%– <50%
4% 30%– <40%
6% 20%– <30%
5% 10%– <20%
9% 1%– <10%
1%
>0%– <1%
16% 0%
11
Automated
Screening
1
Manual
Review
2
Accept
Reject
3
Fraud Claim
Management
4 ORDER
RETAINED
REVENUE
Tuning and Management
13
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
13 ©2007 CyberSource Corporation. All rights reserved.
Chargeback Management Tools
Of course disputing chargebacks is not an easy or cost-free
process. Merchants must manage and organize all order,
delivery and payment information to successfully dispute
fraudulent orders with financial institutions. Merchants
are beginning to adopt automated systems for handling
this aspect of the pipeline. As chart #13 shows, larger
merchants, managing higher volumes of fraudulent orders,
tend to invest in automated re-presentment tools more
than the average online merchant. In 2006, merchants
provided estimates of how many hours it takes, on
average, to handle a fraud chargeback. The average time
spent overall was 1.8 hours with a median time of 1.0
hours to handle a fraud chargeback (total time consumed
for research, documentation, submission). The largest
merchants reported a median time of 30 minutes per fraud
chargeback. Clearly, fraud chargeback management is a
significant expense for merchants. Given the time involved
plus fees and penalties it sometimes makes economic
sense for merchants to avoid chargebacks by encouraging
customers to contact them directly instead of first
contacting their payment provider / biller.
Chargebacks—Only Half the Problem
How a fraudulent order is handled can have a significant
impact on bottom line profits. Fraudulent orders are
presented to the merchant via two main routes: as a
chargeback or as a direct request from a consumer
for credit (they claim fraudulent use of their account).
Although chargebacks are the most often talked about
metric, merchants report that chargebacks actually account
for less than half of all fraud claims. This is true for all
sizes of merchants (see chart below).
Overall $500K – <$5M <$500K $5M – <$25M $25M+
Fraud Chargeback Re-presentment:
Win Rate/Net Recovery Rate
(Overall and by Merchant Size)
Annual Online Revenue
% Challenged
% Net Recovery
42%
WIN
RATE
44%
WIN
RATE
51%
WIN
RATE
55%
WIN
RATE
29%
WIN
RATE
5
3
%
3
2
%
4
8
%
4
3
%
5
8
%
3
9
%
5
6
%
3
9
%
5
3
%
3
6
%
n
=
1
6
1

n
=
1
1
5

n
=
3
9

n
=
2
0

n
=
3
9

n
=
3
1

n
=
2
9

n
=
2
1

n
=
5
4

n
=
4
3

10%
0%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Recovery Rate: expressed as % of all fraud-coded chargebacks received
Computed individually for each respondent who answered both questions, then averaged
12
Overall
>
$25M
Chargeback Management &
Re-presentment Tools
(percent of merchants)
2
2
%
4
3
%
10%
0%
20%
30%
40%
50%
13
Overall $500K – <$5M <$500K $5M – <$25M $25M+
% of Fraud Claims:
Chargebacks vs. Credit Issued by Merchant
Annual Online Revenue
Credits Issued
Chargebacks 2006: n=135
6
6
%
3
5
%
7
4
%
2
6
%
6
5
%
3
5
%
7
5
%
2
5
%
5
3
%
4
7
%
10%
0%
20%
30%
40%
50%
60%
70%
80%
90%
100%
14
14
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
Considering the financial impact of both fraud claim
routes (chargebacks and credit issuance/reversal) some
merchants encourage direct consumer contact to address
fraud claims and thus avoid the additional chargeback
fees levied by the merchant bank/processor. Further, if
merchants are evaluating fraud losses solely on the basis
of chargebacks, the actual rate of fraud loss the business
is experiencing may be as much as two times higher due
to the phenomenon of direct credit issuance/reversal.
Fraud Rate Metrics
When monitoring the level and trend of online fraud loss,
we focus on three key metrics: 1) Overall revenue lost as
a percent of total online sales; 2) percent of accepted
orders which turn out to be fraudulent (domestic and
international); and 3) the average value of a fraudulent
order relative to a valid order. Fraud rates vary widely by
merchant and depend on a variety of factors such as online
sales volume, type of products or services sold online, and
how such products/services are delivered and paid for. It is
important that merchants track key fraud metrics over time
and evaluate their performance relative to their peer group
(both size and industry). Note that this report provides
benchmarks on total fraud rates (chargebacks + credits
issued directly to consumers by merchants). As such, these
metrics tend to be higher than those reported by banks and
credit card associations which generally base reported rates
on chargeback activity only.
Depending on what products or services are being sold
online, fraud loss risk tolerances and order rejection
rates can vary significantly. The survey data supports that
risk practices vary widely by type of online merchant.
Merchants selling high cost goods with relatively low gross
margins, like most consumer electronics products, tend to
err on the side of rejecting more orders to avoid expensive
fraud losses while merchants who are less subject to fraud
attacks can achieve similar fraud loss rates while rejecting
relatively few orders (see Flowers/Toys/Gifts & Food
merchants in chart #15). Over the past few years, as fraud
rates have remained relatively stable, we have compiled
data on fraud practices and benchmarks by industry (see
appendix for how to obtain these benchmarks).
Direct Revenue Loss Rates
Revenue loss rates vary by a merchant’s online revenue
size. Very large merchants typically use more tools and
have more experience and resources to manage online
fraud so their overall fraud rates tend to be lower than
the average (overall) rate. Revenue loss measurement
includes not only the value of orders on which fraudulent
chargebacks are received, but also the cost of any credits
issued to avoid such chargebacks. Figures include both
chargebacks and credits issued directly by the merchant
in response to fraud claims.
Fraudulent Order Rate for Accepted Orders
Another key metric is the number of accepted orders that
later turn out to be fraudulent. Expressed as a percent of
total orders, this metric is typically lower than the revenue
loss percent since the average value of fraudulent orders
tends to be greater than the average value of valid orders,
which causes the fraud rate as measured by revenues
to be higher. Overall,
39% of merchants report
experiencing a fraudulent
order rate of 1% or more
in both 2005 and 2006
survey data.
International Orders Carry
Higher Risk
Sixty-one percent of
merchants surveyed
accepted orders from
outside the U.S. & Canada
in 2006. International sales
accounted for an average
of 17% of total orders for
these merchants. That same
group reported that the
actual direct fraud rate on
6.0%
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Key Performance Metrics By Online Goods Segment
5.0%
4.0%
3.0%
2.0%
1.0%
5
.
6
%
0
.
6
%
Order Reject Rate
Fraud Rate
0
.
7
%
2
.
4
%
0
.
5
%
4
.
2
%
1
.
2
%
4
.
4
%
1
.
4
%
2
.
6
%
4
.
5
%
1
.
3
%
1
.
4
%
3
.
4
%
1
.
1
%
4
.
1
%
15
15
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
15 ©2007 CyberSource Corporation. All rights reserved.
international orders averaged 2.7%, or more than twice
the overall fraud rate for domestic online orders. While
online sales in the U.S. are still growing by 20% or more
each year, sales in Europe and many other markets are
showing even higher growth. Though international markets
represent an attractive opportunity, online merchants must
make sure that their fraud detection and management
systems are robust enough to handle the additional risk
involved. Merchants who sell online outside of the U.S.
& Canada report that they reject international orders due
to suspicion of fraud at a rate that is three times the
domestic rate of 4.1% — rejecting approximately 1 out
of every 8 international orders received.
Average Value of Fraudulent Order Higher than a Valid Order
The median value of a fraudulent order in the survey was
$152 or 24% higher than the $123 median value of a
valid order.
0.0%
Overall $500K – <$5M <$500K $5M – <$25M $25M+
Average % Online Revenue Lost to Payment Fraud
3.0%
2.5%
1.5%
2.0%
1.0%
0.5%
1
.
5
%
1
.
4
%
1
.
1
%
0
.
9
%
2004
2005
2006
1
.
2
%
1
.
8
%
1
.
8
%
1
.
4
%
1
.
8
%
1
.
6
%
2
.
5
%
1
.
6
% 1
.
8
%
1
.
6
%
1
.
6
%
Annual Online Revenue
16
0.0%
Overall $500K – <$5M <$500K $5M – <$25M $25M+
Average % Accepted Orders Resulting in Fraud Losses
2.0%
1.5%
1.0%
0.5%
(A fraud chargeback was received on the orders OR a credit was issued directly to a customer
who claims not to have placed an order)
1
.
3
%
1
.
2
%
0
.
9
%
0
.
8
%
2004
2005
2006
1
.
1
%
1
.
7
%
1
.
3
%
1
.
1
%
1
.
1
%
1
.
2
%
1
.
8
%
1
.
0
%
1
.
3
%
0
.
9
%
1
.
0
%
Annual Online Revenue
17
0.0%
International Fraud Rate
2.5x Overall Rate
3.0%
2.5%
1.5%
2.0%
1.0%
0.5%
North America Outside USA/Canada
Location of Order Origination
1
.
1
%
2
.
7
%
2
.
4
%
1
.
0
%
2005 n=325, 150
2006 n=278, 151
$0
Valid vs. Fraudulent Order Value
2006
$400
$350
$250
$300
$200
$150
$100
$50
Overall $25M
+
Annual Online Revenue
$
1
5
2
$
3
4
0
$
1
9
3
$
1
2
3
Valid Order
Fraudulent Order
n
=
3
4
8

n
=
3
2
2

n
=
8
6
*

n
=
8
2
*

*Median used to minimize impact of outliers
19
18
16
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
Maintaining and Tuning Screening Rules
Among merchants having an automated order screening system in place, 49% have systems that allow business
managers to modify decision rules without assistance from internal IT staff or external third parties (meaning overall,
only 16% of all merchants have systems in place allowing business managers to modify rules). The ability to adjust
automated order screening systems quickly helps manage the order review flow, tailor rules to new products, and adapt
to new fraud trends as they are encountered. Without this ability merchants cannot easily minimize reject rates, review
costs or fraud rates. Additionally, giving business managers the capability to adjust business rules on the fly reduces
the costs and burden of IT support.
Tuning & Management
Automated
Screening
1
Manual
Review
2
Accept
Reject
3
Fraud Claim
Management
4 ORDER
RETAINED
REVENUE
Tuning and Management
Automated Decision / Order Screening
System in Place
(all merchants)
2005: 75% NO
25% Used
43% No Assistance
2006
Can Business Managers Modify Decision Rules
Without IT Intervention?
(of those having an automated decision system)
n=351
n=112
Yes: 49%
No assistance
required
No: 51%
Assistance from
IT or 3
rd
party
required
(Net = 16%)
32% YES
68% NO
20
17
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
17 ©2007 CyberSource Corporation. All rights reserved.
Merchant Budgets for Fraud Management
How much are online merchants spending to mitigate
fraud risk? Fourty-four percent of merchants spend 0.5%
or more of their online revenues to manage online payment
fraud while 56% spend less than 0.5%. Across all
merchants, the median ratio of fraud management expense
to sales ranges from 0.3% in this year’s survey to 0.5%
reported in 2005, although some merchants in high risk
categories are spending significantly more. These spending
estimates include the costs of mitigating fraud risk
(internal and external systems and services, management
and development staff, and review staffs). Direct fraud loss
(chargebacks/credits, lost goods and associated shipping
costs), as well as the opportunity cost associated with valid
order rejection are not included here. (See chart #21)
Budget Allocation
On average, order review staff costs consume 46% of the
fraud mitigation budget (see chart #22). The remainder is
allocated as follows: 28% for third party tools or services
and 26% on internally developed tools and systems.
Clearly, review staff costs are the dominant factor, and only
20% of merchants cite plans to increase review staffing in
2007. Reducing the need for manual review and increasing
the efficiency and effectiveness of reviewers is key to
growing online business profits and managing the total cost
of online payment fraud. One place to start is by improving
the automated detection of risky orders in order to reduce
order review volumes.
<0.2% 0.5%– <1.0% 0.2%– <0.5% 1.0%– <4.0% 4.0%+
Percent of Revenue Merchants Spend
on Fraud Management 2006
(Percent of merchants operating at defined expense level)
% of Annual Online Revenues Spent to Manage Fraud
(Staff, etc. excluding fraud loss)
2005 n=107
2006 n=83
2
6
%
3
3
%
2
3
%
2
3
%
1
9
%
1
3
%
2
0
%
1
6
%
1
2
%
1
6
%
Median
2005 = 0.5%
2006 = 0.3%
0%
40%
30%
20%
10%
21
Review Staffing – 2006
1
2
3 – 4
5 – 9
10+
# Full-Time
Review Staff
$500K
$1 Mil
$9 Mil
$85 Mil
$200 Mil
Average*
Annual Online
Revenue
$500K
$500K
$2M – $3M
$9M – $17M
up to $20M
Annual
Revenue
Per Staff
Planned
Staffing
Levels
for 2007
Increase
20%
Same
74%
Decrease
7%
Base: Those with 1 or more full-time manual review staff n = 280
*Median used to minimize impact of outliers
Average % Spending Allocation
for Fraud Management 2006
Mean (including 0)
n=351
Order
Review
Staff
46%
3
rd
Party
Tools
28%
26%
Internal
Tools &
System
Note: Merchants
>
$25M
in online revenues
average 59% of budget
on review staffing
22
18
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
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.
Request A Custom View for Your Business
This is an example of a full pipeline process analysis for select merchants in the survey.
To get a view crafted for your company’s size and/or industry, please contact CyberSource
at 1.888.330.2300, or online at www.cybersource.com/contact_us
19
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
19 ©2007 CyberSource Corporation. All rights reserved.
Resources & Solutions
To find information on CyberSource’s industry leading risk
management solutions, self-paced webinars on decision
management, and other whitepapers on electronic
payment management, visit our Resource Center at
www.cybersource.com. For sales assistance phone:
1-888-330-2300; or e-mail: sales@cybersource.com
CyberSource Payment Management
Solutions
CyberSource offers a comprehensive portfolio of modular
services and tools to help your company manage your entire
payment pipeline to optimize sales results.
Payment Acceptance
Merchant accounts for domestic and global payment
acceptance, including: worldwide credit and debit
cards, regional cards, direct debit, bank transfers,
electronic checks and alternative payment types
such as Bill Me Later and PayPal. CyberSource
also provides professional services to help you
integrate payment with front-end and
back-office systems.
Risk Management/Order Screening
CyberSource provides client services to
help you analyze, design and manage
your order screening and fraud detection
processes—everything from screening strategies
and risk threshold optimization analysis to
ongoing monitoring, order review and chargeback
management. Optionally, you can use our decision and
case management systems, and robust array of fraud
detection and verification tools (risk scoring, Verified by
Visa/MasterCard SecureCode, IP Geolocation, Address
Validation, identity morphing detection, device mapping,
and more) to streamline fraud management using your own
internal resources.
Processing Management
CyberSource provides on-demand access to over 45
processors (over 120 countries) around the globe.
CyberSource’s highly reliable, triple-redundant datacenters
are PCI-compliant worldwide and include sophisticated
processing management capability to prevent subscription
payment failures and rate downgrades.
Collection & Reconciliation
A full array of online and exportable payment reporting
capability is available to streamline reconciliation activity.
Further, systems can be installed to automate up to 90%
of the tasks associated with payment reconciliation and
chargeback re-presentment.
Payment Security
CyberSource provides secure storage and hosted payment
acceptance services to help you bolster payment security
and streamline PCI compliance. We also provide PCI
compliance consulting and remediation services, as well as
complimentary PCI vulnerability scanning services to help
you maintain compliance.
Professional Services
CyberSource maintains a team of experienced payment
consultants to assist with payment systems planning,
system and process design, and implementation and
integration. Our client services team is additionally
available to help you monitor, tune, or fully outsource
portions of your payment operations.
3 Managed Services
2 Design & Installation
1
Systems & Services
PAYMENT SECURITY
Order
Screening
Collection &
Reconciliation
Global Payment
Acceptance
Processing
Management
L A S E R
Bank
Tr ans f er
Direct
Debit
ORDER
• Online
• Call Center
• IVR
• Kiosk
• POS
• ERP
With Performance
Guarantees
C Y B E R S O U R C E 8
T H
A N N U A L O N L I N E F R A U D R E P O R T
North America
CyberSource Corporation
1295 Charleston Road
Mountain View, CA 94043
T: 888.330.2300
T: 650.965.6000
F: 650.625.9145
Email: info@cybersource.com
Europe
CyberSource Ltd.
The Waterfront
300 Thames Valley Park Drive
Thames Valley Park
Reading RG6 1PT
United Kingdom
T: +44 (0) 118.929.4840
F: +44 (0) 870.460.1931
Email: uk@cybersource.com
Japan
CyberSource KK
3-25-18 Shibuya, Shibuya-ku
Tokyo, 150-0002 Japan
T: +81.3.4363.4111
F: +81.3.4363.4118
Email: mail@cybersource.co.jp
CyberSource Corporation is a leading provider of electronic payment, risk management and payment security solutions.
CyberSource solutions enable electronic payment processing for Web, call center, and POS environments. CyberSource
also offers industry leading risk management solutions for merchants accepting card-not-present transactions.
CyberSource Professional Services designs, integrates, and optimizes commerce transaction processing systems.
Thousands of businesses use CyberSource solutions, including half the companies comprising the Dow Jones Industrial
Average. The company is headquartered in Mountain View, California, and has sales and service offices in Japan, the
United Kingdom, and other locations in the United States.
For More Information
• Call 1.888.330.2300
• Email info@cybersource.com
• Visit www.cybersource.com
About CyberSource
Get Tailored Views of Risk Management Pipeline

Metrics
A summary of CyberSource’s full pipeline process analysis is provided in the Appendix of this report. To get a view crafted for your
company’s size and industry, please contact CyberSource at 1.888.330.2300 or online at www.cybersource.com/contact_us.
For additional information, whitepapers and webinars, or sales assistance:
• Contact CyberSource: 1.888.330.2300 or www.cybersource.com/contact_us
• Risk Management Solutions: visit www.cybersource.com/risksolutions
• Global Payment & Security Solutions: visit www.cybersource.com/products_and_services/global_payments
Thank you for reading CyberSource’s 8th Annual Fraud Report. This is your chance to let us
know whether this annual fraud report is of use to you and the industry. By participating in this
brief survey, you have the opportunity to share your opinion. Your input is appreciated. Please take
our survey at www.cybersource.com/fraudreportsurvey
UK Fraud Report: www.cybersource.co.uk/ukfraudreport

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