Online Fraudsters Nab $1.4 Billion from Airlines

Although airline ticket sales rebounded in 2010, loss due to online payment fraud is down since the last survey, in both percentage of overall online revenue and bookings, finds a new report by CyberSource Corporation.

 

In 2010, airlines worldwide lost an estimated $1.4 billion dollars in revenue due to online fraud perpetrated on their websites, which represented 0.9% of total worldwide online airline ticket sales, says the "Airline Online Fraud Report 2011" report.

 

In comparison, airlines reported losing $1.7 billion in the previous survey, representing 1.3% of total online airline ticket sales worldwide. This represents a 31% reduction in fraud loss rate from what was reported in the previous survey.

 

However, over a quarter of airlines surveyed expected their fraud loss rate to be greater than 1% of their online revenue in 2010, suggesting there are still some airlines that could improve their online fraud management processes.

 

Based on how revenue loss was addressed in the survey, the fraud losses reported include losses for all payment methods together with fraud chargebacks from credit and debit cards.

 

The fraud loss rate is based on revenue derived from an airline’s website only, and does not include card-present or telephone transactions, which are often included in the fraud loss metrics provided by card associations.

 

Finally, the loss rates reported in the survey include any losses due to the issuance of credits or refunds to customers to avoid chargeback disputes or to maintain goodwill — a common practice among non-travel online merchants. Credits may also be issued by a different airline department, which may not be responsible for chargebacks or merchant account management.

Fraud loss rates vary by online sales experience and type of airline. Airlines with less than three years of online sales experience have a fraud loss rate which is three times higher than airlines with more than ten years. This can be expected, given that airlines with more experience have been on the front lines longer, and are more likely to have better fraud tools and processes in place.

 

Looking at fraud loss by airline type, low cost carriers have one-third the fraud loss rate of full fare carriers. Low cost carriers tend to have slimmer margins than full fare carriers, which may compel them to focus more strongly on deterring fraud. Fraud screening may also be less complex, as low cost carriers typically sell point-to-point fares (versus multi-leg trips) and may not have frequent flyer programs or multiple cabin classes to consider.

 

Airlines report that they win almost a third of the fraud chargebacks they re-present, resulting in an average net recovery of 22% of initial fraud chargeback claims. However, over a quarter of airlines surveyed report that they challenge fewer than 10% of initial fraud claims, while 42% challenge 70% or more of their initial fraud claims. Airlines that do not have an efficient process for fighting fraud claims are incurring additional unnecessary fraud losses.

 

Efficiency Gains Required

As online sales continue to grow while budgets and resources remain relatively fixed, airlines face the challenge of screening more online bookings while keeping booking rejection and fraud rates as low as possible, to maximize sales and profits.

 

Online payment fraud continues to impact revenue from online sales. However, other than direct revenue loss due to fraud, there are additional costs such as the rejection of valid bookings, the staffing of manual review teams, the administration of fraud claims and the challenges associated with business scalability. Inefficiencies and further profit loss can occur if the airline’s payment fraud processes and the above costs are not carefully managed.

 

Airlines can gain efficiency by taking a total pipeline view of operations and costs. While the fraud rate is one metric to monitor (and contain within industry and card brand limits), an end-to-end view is required to arrive at the best possible financial outcome.

 

In 2010, “profit leaks” in the Risk Management Pipeline impacted as much as one quarter of online bookings — restricting profits, operating efficiency and scalability.

 

 

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