E-commerce Fraud: The New Reality

Thomas Chim

Raj Nair

Chris Geegan

Mike Grimsley

E-commerce loses climb

– $700 million more in losses in e-commerce revenue this year– Businesses will lose $2.6billion to online fraud in 2004 – 34%

increase over 2003 figures– Small and midsize businesses (US$500,000 to US$5 million) will

be hardest hit. Will lose up to 2.5 percent of its online revenue to fraud, compared to 1.9 percent last year.

– Companies with online revenue between US$5 million and US$25 million will see a loss rate of 1.5 percent (same as last year)

– Those with US$25 million-plus revenue anticipate losses of 1.1 percent (down slightly from last year's 1.3 percent loss rate).

– International e-commerce orders continue to spell more trouble for retailers, with order rejection and fraud rates up to three times higher than domestic orders. Merchants that accept orders from outside North America reject over 13 percent of orders on suspicion of fraud. Among orders accepted, 3.8 percent turn out to be fraudulent -- which is nearly 3 times higher than the overall rate.

Impact on E-commerce

• merchants rejected nearly 6 percent of orders in 2004, up from 4.6 percent in 2003.

• merchants are refusing another 4 or 5 orders on suspicion of fraud• More manual intervention: 73 percent of merchants manually check

orders today, a 12 percent increase over last year. In addition, the number of orders being manually reviewed rose to 27 percent of all orders, up from 23 percent in 2003.

• The median price on fraudulently ordered merchandise in 2004 was

$150 while the median amount for a legitimate purchase was $100.

Cost of Fraud Prevention

• The highest costs associated with the management of fraud are typically loss of potential revenue and wages. A key source of revenue loss occurs when good orders are rejected for fear of fraud. rejection rates during 2004 were nearly 6%, up from 4.6% last year.

• Manual order review and its associated costs are equally threatening to merchant profits. 73% of merchants are manually checking orders today, up 12% from last year.

• 27% of all orders were manually reviewed in 2004 versus 23% of all orders 2003. This leads to obvious questions about merchant capability of coping with continuing eCommerce growth.

• Only 21% of merchants expect to increase the size of their review staff in 2005, so greater productivity among order checkers is clearly required.

• In addition to manual review, 82% of merchants use Address Verification Service, 56% use Card Verification Number checking, and 53% use internally-built fraud screens.

• The number of merchants using commercial fraud screening solutions grew 55% from the year before: 18% in 2003 and 28% in 2004.

Preventing online E-Commerce Fraud

• Carefully Review Orders • Contact, Shipping & Credit Card Information • Address Verification Service (AVS)• Free Email Addresses • Document All Contacts • Domain Name Records • Above Average Order Amounts • Use Fraudulent Notices • Telephone Search • Call the Consumer

What is Identity Theft?

• It’s a crime that affects 7-10 million a year

• Takes many years to clear up

• Ruins your credit

• Many resources available

Two Types

• Account Fraud • Application Fraud

How is ID Theft Possible?

• Internet• Dumpster Diving• Mailboxes• Shoulder Surfing• Public Records

Government Intervention

• Identity Theft and Assumption Deterrence Act

• Another law allows 15 years’ imprisonment and forfeiture of property

Catching the Crook

• Hard• Repeat Offenses• Victim still suffers

Reducing Your Chances of Being a Victim

• SCAM• Stingy• Check• Ask• Maintain

E-Mail Fraud

There are several types of Email Fraud

• Phishing• Nigerian Letter Fraud• Online Auction Related

E-Mail Phishing

• Replica of an existing web page is created in order to illegally obtain information from Consumers

• Link sent via e-mail • E-mail resembles an email from a legitimate

company

Recently Affected Companies

• PayPal• Citibank• Visa• Compass Bank• Washington Mutual

Nigerian Letter Fraud

• E-mail sent that tells a story of hardship• The e-mail solicits the help of the recipient and

promises a large payback for their assistance• If recipient responds, the sender will usually

request an upfront payment for arrangements or the recipient’s bank account information

Fraud and Ebay

Ebay (auction based site)

User Anonimity

Lack of Face to Face Contact

Fraud and Ebay• Buyer Protection on eBay - What you can do if something goes

wrong. • Fraud Alert - How you can notify eBay and your seller about your

transaction by using our online Fraud Alert. • Protection Claim: Eligibility Requirements - Find out whether or not

you are eligible to file a claim for reimbursement from eBay for losses due to fraud.

• Protection Claim: Coverage Provided - Information about the circumstances under which eBay will reimburse you through the Protection Claim program.

• Protection Claim: How to File - How buyers can file a Protection Claim with eBay.

• Sending Payments - Find out which payment method is safest and most appropriate for you before purchasing an item.

• Tips for Buyers - Steps buyers can take to ensure a successful transaction.

Fraud and Ebay

• Fraud.org – Average Loss: $803 – Top 10 Frauds

• Online Auctions* ---- 28%• General Merchandise ---- 19%• Nigerian Money Offers ---- 9%• Phishing ---- 5%• Information/Adult Services ---- 3%• Lotteries/lottery clubs ---- 2%• Fake check scams ---- 2%• Computer equipment/software ---- 1%• Fake escrow services ---- 1%• Internet Access Services ---- 1%