Online merchants still rely on manual fraud checks

Out-Law News | 27 Jan 2006 | 12:24 pm | 2 min. read

Payer authentication schemes such as Verified by Visa and MasterCard SecureCode are the anti-fraud tools most likely to be adopted by online retailers in the UK this year, but 19% of orders still undergo manual checks.

The findings are part of the second annual UK online fraud survey from CyberSource, an electronic payment and risk management specialist.

The Visa and MasterCard systems reduce the likelihood of online fraud by requiring shoppers to provide a password as well as their card details. Collectively known as 3-D Secure, the systems also transfer fraud liability from the internet retailer to the card issuer. Around 29% of merchants expect to introduce them during 2006; another 25% were already using them in 2005.

Most merchants are layering their security – using an average of four anti-fraud measures. Others include Address Verification Service and Card Verification Number (a three-digit code on the back of each card).

Automated checking and authentication schemes are used by 70% of merchants, according to CyberSource.

But the survey of 160 online retailers in the UK also found that manual checks are performed on almost a fifth of all incoming orders.

By far the most popular type of manual check is telephone or email contact with the customer, followed by communication with the customer's bank, checking order histories and negative lists, and consulting third parties – all of which were roughly on a par. Over two-thirds of merchants said they accept 80% or more of orders that have been manually reviewed.

Contrary to the public perception of internet fraud, CyberSource reports that online retailers are winning the battle against fraudsters.

The survey found that 65% had seen losses from online fraud stall or fall in the last 12 months, while only 16% reported that fraud has risen as a proportion of revenues.

"While fraud remains a problem, there is a clear disconnect between consumer feeling and retailer reality about the extent of online fraud,” said Nathan Jackson, managing director of CyberSource.

“While retailers are investing heavily in beating fraud – often successfully according to our research – the public is being made to feel nervous about shopping on the web," he said. "The online retail community needs to continue working to beat fraudsters, but while we should be promoting prudence we shouldn’t be scaring the consumer away from buying online."

CyberSource’s inaugural 2005 report showed that online retailers feared a leap in internet fraud driven by the introduction of chip and PIN to high street stores. Instead, the latest figures from payment association APACS show that online fraud climbed by 5% in the first six months of 2005, which is relatively low when compared to fraud growth rates in other sales channels.

According to the figures from APACS, the major growth has been in other forms of Card Not Present fraud against businesses that might lack the sophisticated anti-fraud technology employed by online retailers, such as mail order and telephone order businesses – which saw a massive rise of 116% in fraud in the same period.

The new CyberSource report also reveals that 34% of merchants are not planning to introduce any new anti-fraud measures in the course of 2006. The report cautions against complacency.

The report urges merchants to maintain their focus in order to keep up with the ingenuity of fraudsters, and suggests that business should begin to use their security tools “as more than just precautionary tools – as technologies that can empower greater efficiencies, competitive edge and customer satisfaction.”