How Many Falsely-Flagged Fraudulent Orders Are Retailers Rejecting?

Written by Evan Schuman
November 15th, 2006

An interesting report was published Tuesday by CyberSource, in the form of its annual E-Commerce fraud report. Beyond touting some $3 billion in fraud in the U.S. this year?a 7 percent increase compared with 2005?the report talked about 1.4 percent of retail revenue lost to fraud this year, a slight decrease from the 1.6 percent reported the year earlier.

What’s interesting is not the percent drop (a 0.2 percent change is not likely statistically significant) but this claim in the news release accompanying the report’s release: “Approximately one percent of accepted orders ultimately turn out to be fraudulent, but merchants also reject four percent of their incoming orders due to suspicion of fraud?some valid orders are almost certainly being left on the table.”

According to Doug Schwegman, director of market intelligence for CyberSource, the one percent referenced (actually closer to 0.8 percent, he said) is just a theory, a guess from CyberSource. Although the surveyed retailers do reference a roughly one percent of fraudulent orders, the question asked about “accepted orders resulting in fraud losses,” meaning that the one percent is on top of the roughly four percent of the orders that they have rejected because of suspected fraud. Schwegman said it’s clear that some percent of the rejected orders are indeed legitimate and his team believes it to be about 0.8 percent.

It’s an interesting issue because it’s certainly easy to agree that some percent of rejected orders are actually legit and one percent seems as good a guess as any, but it’s the precision of that guess (0.8 percent?) that starts to wander into the area of being too specific an answer for such an utterly unknowable concept.

With E-Mail SPAM filtering, it’s somewhat easier to determine false positives because a consumers can look inside their SPAM folders and, over time, see roughly how many legit messages are caught for every 100 true SPAMs. (For my SPAM filter, it’s probably about one in every 500. But given that I received almost 1,000 SPAM messages on a given day, that can mean as many as two legit readers messages a day that can disappear. Editor messages sometimes get lost that way, too, but I shed far fewer tears about that.)

But few retailers have such luxuries. Reviewing the list of rejected purchases each day does little good. A retailer theoretically could try contacting all of those people to see if any were real customers (and perhaps offering them some huge gift and an apology, if any are found), but I’ve yet to hear of one trying that. Most retailers rely on the much more passive approach of hoping that wrongfully wronged customers will call customer service and complain. It’s more likely they’ll go to the competition, badmouthing the first retailer all the way.

There’s an even more important issue at play here. Let’s assume for the moment that the 0.8 percent figure is precisely accurate. What is a retail IT manager supposed to do about that? Liberalize their fraud-detection rules? Not likely. First, getting a zero percent false positive system isn’t going to happen.

With the acceptance of the inevitable errors, is slightly less than one percent such a bad figure? Put another way, how much more accurate is realistically achievable? Schwegman didn’t have an easy answer, but argued that it would depend on the margins of a particular retailer. In the security-versus-profit balancing act, is slightly reducing the falsely-accused honest customers going to deliver more profit than will be lost by slightly increasing the number of actual frauds?

A simpler alternative for some retailers is to prominently post phone numbers and E-mails for senior customer service managers with any message sent to a rejected customer. Done properly, it would probably make life easy for the vast majority of incorrectly-rejected orders to be preserved after personal screening. Note: Those numbers had better not have huge hold times. Insulted, falsely-accused customers are not known for being especially patient.


Comments are closed.


StorefrontBacktalk delivers the latest retail technology news & analysis. Join more than 60,000 retail IT leaders who subscribe to our free weekly email. Sign up today!

Most Recent Comments

Why Did Gonzales Hackers Like European Cards So Much Better?

I am still unclear about the core point here-- why higher value of European cards. Supply and demand, yes, makes sense. But the fact that the cards were chip and pin (EMV) should make them less valuable because that demonstrably reduces the ability to use them fraudulently. Did the author mean that the chip and pin cards could be used in a country where EMV is not implemented--the US--and this mis-match make it easier to us them since the issuing banks may not have as robust anti-fraud controls as non-EMV banks because they assumed EMV would do the fraud prevention for them Read more...
Two possible reasons that I can think of and have seen in the past - 1) Cards issued by European banks when used online cross border don't usually support AVS checks. So, when a European card is used with a billing address that's in the US, an ecom merchant wouldn't necessarily know that the shipping zip code doesn't match the billing code. 2) Also, in offline chip countries the card determines whether or not a transaction is approved, not the issuer. In my experience, European issuers haven't developed the same checks on authorization requests as US issuers. So, these cards might be more valuable because they are more likely to get approved. Read more...
A smart card slot in terminals doesn't mean there is a reader or that the reader is activated. Then, activated reader or not, the U.S. processors don't have apps certified or ready to load into those terminals to accept and process smart card transactions just yet. Don't get your card(t) before the terminal (horse). Read more...
The marketplace does speak. More fraud capacity translates to higher value for the stolen data. Because nearly 100% of all US transactions are authorized online in real time, we have less fraud regardless of whether the card is Magstripe only or chip and PIn. Hence, $10 prices for US cards vs $25 for the European counterparts. Read more...
@David True. The European cards have both an EMV chip AND a mag stripe. Europeans may generally use the chip for their transactions, but the insecure stripe remains vulnerable to skimming, whether it be from a false front on an ATM or a dishonest waiter with a handheld skimmer. If their stripe is skimmed, the track data can still be cloned and used fraudulently in the United States. If European banks only detect fraud from 9-5 GMT, that might explain why American criminals prefer them over American bank issued cards, who have fraud detection in place 24x7. Read more...

Our apologies. Due to legal and security copyright issues, we can't facilitate the printing of Premium Content. If you absolutely need a hard copy, please contact customer service.