U.S. and Canadian retailers lost $4 billion last year to online fraud, according to CyberSource’s “Online Fraud Report" (pdf). On average, retailers lose 1.4 percent of their revenue to online fraud. One of the problems is that, while the online fraud rate holds, due to the economic slowdown retailers are declining fewer payments suspected to be fraudulent, despite the fact that more than a quarter of all transactions are manually reviewed for fraud after having passed through automated review. As manual review is time consuming, expensive and difficult to scale, retailers are adding more automated fraud-recognition tools to their sites. The amount of tool per site ranges from 4.7 to 6.3 according to the retailer’s size.

The three most effective anti-fraud tools, according to the retailers surveyed by CyberSource, are company specific fraud pages, out-of-wallet or in-wallet challenge systems and Device Fingerprinting.

The problem retailers have in rejecting a high percentage of suspected fraud is that it cuts into revenues when legitimate transactions are denied, a significant part of money lost indirectly because of fraud, which has a long list of ancillary costs.

“Besides direct revenue losses, 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,” according to the report.

“Merchants can gain efficiency by taking a total pipeline view of operations and costs,” according to the report.

By Mark Alvarez