• by Sarah Mahoney  @mahoney_sarah, December 21, 2006

Christmas shopping may be hard on consumers, but it's hell on the fraud departments of online retailers.

CyberSource, in its 8th annual survey of eCommerce fraud, said U.S. merchants will lose as much as $3 billion in eCommerce revenue to fraud in 2006, up from $2.8 billion in 2005.

As a percent of revenue, fraud losses will be slightly less this year--merchants expect to lose 1.4% of revenue, down from 1.6% the year before. Overall, merchants say 1.1% of accepted orders later turn out to be fraudulent.

The good news, according to the Merchant Risk Council, which surveyed its members on fraud rates earlier this year, is that "online fraud rates for merchants surveyed are now similar to the fraud rates of brick-and-mortar stores, a significant improvement over previous years when online fraud outpaced 'card present' fraud by as much as five times."

But retailers are also turning away sales in order to do so: "Online retailers also reject about 4% of orders on suspicion of fraud," CyberSource said. "Even if only one out of five of those prove to be valid, merchants will have turned away another $1.6 billion in sales--likely losing them to a competitor."

In response to fraud risk, more merchants than ever before are reviewing some orders manually, with 81% of merchants in the sample now engaged in manual review, compared to 73% last year.

And because fraudsters use increasingly sophisticated schemes, it's hard for retailers to be confident that the technology they use is working, MRC said.

"Since 2001, online merchants report that the effectiveness of Address Verification Systems, for example, has dropped from 70% to 25%, although its use rose from 70% to 83% over the same period. Similarly, the adoption of Card Verification Codes increased from 38% to 73%, but merchants report a decline in its effectiveness from 49% to 31%."