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What do New York and Nigeria have in common? Something far more serious than beginning with the letter "n." Both of these regions have earned the dubious distinction of ranking among the riskiest places in the world for e-commerce, according to a survey by CyberSource Corporation (Nasdaq: CYBS).
The Big Apple (Nasdaq: AAPL) was chosen as the riskiest North American metropolitan area and Nigeria was chosen as the riskiest country. Merchants defined "riskiest" as meaning that orders from these areas are most likely to be fraudulent (that is, made with stolen credit cards or with improperly obtained credit card information).
Other U.S. cities in the top five include Miami, Los Angeles, Chicago/Detroit (tied for fourth place) and the San Francisco Bay Area, respectively. Indonesia, Russia, China and the United Kingdom/Afghanistan (tied for fifth place) round out the top five international e-commerce risks.
Impacting E-Commerce
"Few merchants will publicly discuss this, but it's no secret that some areas of the country carry tarnished reputations due to a high incidence of e-commerce fraud," Doug Schwegman, CyberSource director of market intelligence, said.
Residents of cities like New York, Miami and other cited centers of fraud might ultimately pay a price for their area's reputation, but it also costs the merchant. Online merchants might require purchasers in certain "hot zones" to take more elaborate steps for identification, such as asking the purchaser to make a telephone call to verify the order. That is an inefficient practice for both the buyer and seller that goes against the very grain of e-commerce.
Schwegman said some merchants routinely flag orders from high fraud areas for manual (therefore slower) processing. In extreme cases, where small merchants are struggling to get orders out by the holidays, the order could even be rejected.
"It's not fair, but if merchants have gotten routinely burned by orders from one ZIP code, it's understandable that they will just take longer, harder looks at orders from that location," Schwegman said. "Many merchants resist overseas demand for the same reason. Orders from outside the U.S. and Canada are three times more likely to be fraudulent, according to our research."
Tracing the Origins
VeriSign (Nasdaq: VRSN) Vice President of Payment Services Trevor Healy told the E-Commerce Times that numbers can often be deceiving. Before merchants spend time and money on fraud efforts, he said, they need to understand the origin of the fraud.
"Most of the fraud comes from within the U.S.," Healy said. "It is not exactly true that there are evil people in Vietnam and Russia that are a threat to our online commerce environment. One has to investigate the initial impetus for the fraud."
Experts said one reason for the concentration of electronic fraud in distinct areas of the world might be the availability of trans-shippers in those regions.
"Fraudsters located in Nigeria, Indonesia or some parts of Eastern Europe now know their orders are going to be denied," Schwegman said. "There is just too much history of fraud from those parts of the world. So they order to a domestic address where someone will accept the package and forward it to the real location abroad."
Automating Fraud Protection
While smaller merchants might be doing manual checks to prevent fraud protection, experts said the ultimate solution must be automated if an e-tailer is going to grow in today's business environment. Healy warned that if a merchant is hacked and credit card numbers are stolen, then the merchant will lose his or her privilege to process credit card payments and potentially will go out of business.
Dave Alampi, vice president of product marketing and management for e-commerce service provider Digital River (Nasdaq: DRIV), told the E-Commerce Times that a combination of automated fraud screening tools that uses rules-based math to flag potentially fraudulent orders should precede manual checks to get the best results.
"The goal is to balance fraud-out orders [canceling the order] that are truly fraudulent without frauding out orders that are not fraudulent," Alampi said. "If you lock down the fraud rules too tight, you will actually be missing some potentially significant revenue opportunities. It's an ongoing balance and it does vary by country."
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