Online theft shifts to smaller retailers

Dec 12, 2006 3:00 PM

           

The year-end holiday season typically brings a surge in the number of fraudulent orders received at online retailers, and thieves seem to have shifted techniques to combat tightened security practices among bigger merchants this year.

The evidence so far is anecdotal, but industry leaders say smaller online retailers and those with strong gift-certificate sales are being especially hard hit, the International Herald-Tribune reports.

"Certainly the frauds are trying to take advantage of the very busy times and the volume that fraud departments are trying to process," Tom Sullivan, chairman of the Merchant Risk Council -- a nonprofit antifraud group that represents about 100 online retailers -- tells the newspaper. "They're trying to slip more transactions through."

Fraud against online retailers usually involves credit card numbers stolen off line or in e-mail subterfuge, Sullivan says, rather than breaches of a merchant's online systems. Criminals use the stolen card data to buy goods they can easily resell or just to prove that the data are valid before reselling the data to other thieves.

According to a recent survey of 350 online merchants by CyberSource, an Internet security firm, about 1.4 percent of the average retailer's sales turn out to be fraudulent, compared with 2.9 percent in 2002. Since online sales continue to grow, the overall cost of fraud will reach $3 billion this year, CyberSource said, up from $2.1 billion in 2002.

Online merchants can suffer from illegal purchases in two ways: they must pay back credit card companies for the purchases -- which is why consumers are not charged when their cards are stolen and used; and their sales may drop if, after news about such incidents spreads, prospective shoppers lose their appetite for buying online.

Smaller merchants are being hit hard already. With frauds being thwarted by bigger online companies, more thieves are focusing on merchants that have less security expertise, according to Avivah Litan, an analyst with Gartner Research. Smaller retailers often unwittingly welcome bursts of sales for too long before recognizing that the purchases are from criminals.

As a percentage of overall sales, security is considerably more costly for smaller retailers than bigger ones, Litan says.

Bigger merchants say that while they are never fully comfortable with their fraud prevention efforts, they are improving. "Every year our fraud rates are going down," Mark Vadon, chief executive of Blue Nile, an online jeweler, tells the newspaper.

The Merchant Risk Council, of which Blue Nile is a member, recently circulated a memorandum suggesting that gift cards had become a new target for criminals, with as many as 20 percent of all gift card orders for some merchants being fraudulent.

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