Despite increased efforts to curb online fraud, online retailers in the United States will lose nearly $500 million to fraud and lost sales this holiday shopping season, according to a survey of leading online U.S. merchants conducted by Gartner, Inc. Gartner analysts estimate $160 million will be lost this holiday season to fraud and approximately $315 million will be lost in sales due to suspect transactions.
In October of 2002, Gartner conducted an online survey of 25 leading online U.S. retailers, most belong to the Merchant Fraud Roundtable, an organization dedicated to reducing fraud. The survey examined how the retailers are being impacted by fraud, and what those companies are doing to fight online theft. Gartner also based its conclusions on a survey of more than 50 other leading online merchants in June 2002.
As e-tailers move aggressively to weed out fraudulent transactions, six percent of sales will be rejected, representing a potential $950 million in revenue in the fourth quarter of 2002, according to the surveys. E-tailers are likely to mistakenly reject about two percent of total sales due to unfounded suspicions and therefore lose about $315 million in potential sales. Fraud will cost e-tailers another $160 million in 4Q02.
"E-tailers report that fraud attacks are becoming more sophisticated, frequent and menacing in nature," said Avivah Litan, vice president and research director for Gartner. "Despite efforts to curb online fraud, the rate of fraud has stayed constant at one percent since mid-2000."
E-tailers believe they are not getting the help they need from the credit card companies that issue credit cards to consumers. "Several leading credit card issuers have stopped taking online merchant phone calls in which the retailers request verification of credit card names and addresses when they run across a suspicious transaction," said Litan. "Major online merchants are also highly skeptical that new initiatives by VISA and MasterCard to address fraud through the Verified by VISA and MasterCard SecureCode programs will markedly reduce their fraud losses."
Gartner advises e-tailers to institute a three-tiered program for managing fraud. First, online merchants should apply real-time checks to look for fraudulent activity based on patterns of fraud abuses. Second, weed out suspect transactions for further manual review. Finally, engage in chargeback recovery whereby e-tailers collect money back from issuers for chargebacks that they wrongly absorbed.
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