According to CyberSource Ltd., the UK subsidiary of electronic payment provider CyberSource Corporation, online fraud is a growing challenge for online businesses in the UK.

Although the total rate of fraud increased by ‘only‘ 2.6%, one in 8 online merchants in the UK are now losing 5% or more of their online revenue to fraud and 37% lose at least 1%. All told, more than 40% of the merchants surveyed as part of CyberSource’s 5th Annual Fraud Report saw fraud levels increase online last year.

According to CyberSource’s Dr. Akif Khan, who authored the report, “UK merchants continue to bear a heavy burden of fraud, including high costs and consequent profit losses.

This burden comes in many forms and goes beyond lost revenue. For instance, over 50% of the merchants CyberSource surveyed reject 1% or more of the orders they receive due to fraud concerns. While this certainly helps prevent fraud, there is no doubt that legitimate orders are lost.

But for all the negatives, there is progress. More merchants are investing in new anti-fraud technologies, such as Verified by Visa and MasterCard SecureCode, and are taking steps to verify who their customers are using a variety of increasingly sophisticated techniques. Some merchants are even considering technologies like ‘device fingerprinting‘, which analyzes the characteristics of the device being used to place the order.

Of course, the levels to which merchants are having to go to fight fraud impacts different kinds of merchants disproportionately. Small merchants with smaller budgets can’t afford to use all of the tools that are available and typically rely on one or two third-party tools to fight fraud. Many have yet to implement basic anti-fraud techniques such as AVS verification, leaving them highly-vulnerable.

At the opposite end of the spectrum, the largest of merchants are often burdened by complicated multi-channel operations that are difficult to ‘upgrade‘ as new tools become available.

According to CyberSource, it’s large merchants with £10m to £50m in turnover who are often pure play online retailers that are leading the fight against fraud.

Perhaps the best news for merchants is that most fraudsters remain quite unsophisticated. The most common method of fraud that merchants reported: brute force attacks that use multiple card numbers against various identities until something works.

While this isn’t to say that there aren’t sophisticated criminals out there who are using advanced techniques to defraud merchants, it’s clear that the implementation of basic fraud-fighting tools can stem the tide of much of the fraud.

CyberSource’s report also looked at other trends amongst merchants. Findings of note:

  • Over half of the UK population isn’t shopping online. There are a number of reasons cited but 41% say it’s because of concerns over online security.
  • Slightly more than half of the merchants CyberSource surveyed project growth in 2009. Only 20% see sales increases of more than 20%.
  • Online merchants are increasingly looking overseas for revenue growth. 2008 saw 8% growth in the number of UK merchants shipping to continental Europe and a 12% growth in those shipping to the United States.

The full report can be downloaded from the CyberSource website.