E-Merchant Beware

Computerworld - After credit card fraud started hitting Dave Bundtzen's Internet job-placement business at a rate of 3.5% of all transactions, a single fraudulent charge of $19.95 wound up costing him $64.90.
Credit card companies measure fraud in chargebacks -- the transactions involved in clearing up the bogus charges. On the Internet, those chargebacks run more than three times higher than all other credit card processing mediums combined, according to estimates by Visa International.
A fraud rate of 1% (of gross credit card sales) earns a merchant a "high risk" rating. High risk means high chargeback fees to the merchant. And it's those charges, along with return fees to customers and returned merchandise, that nearly put Bundtzen's company, Phoenix Interactive, out of business.
"Merchants are 100% responsible for the chargebacks in card-not-present charges. Carders are putting the smaller e-merchants out of business. And no one is going after the carders," says Dan Clements, CEO and founder of CardCops in Malibu, Calif.
Clements has been tracking a growing number of Internet "carders" - credit card fraud artists - who are emerging from or joining forces with criminal clans in Russia, Japan and the U.S. Last month, Clements formed CardCops to provide an investigative service for e-merchants.
Other services are popping up around electronic retail fraud losses, as well. For example, CyberSource now offers an e-merchant fraud-detection scoring system based on behavioral and pattern analysis. With this system, consumer orders at 3 a.m. using a post office box for a shipping address would get a "high probability of fraud" score.
And the CyberSource system ties into Visa's neural fraud-detection network that tracks fraud reports. This network improved Visa card transaction accuracy by more than 50%, according to Jean Bruesewitz, senior vice president for advanced risk solutions at the company.
Also, Visa last fall piloted a payer authentication program called 3D Secure that's based on digital certificates. This directory service verifies a shopper's authenticity through issuing banks participating in the program.
"If you look at the difference between store transactions and Internet transactions, what you're really trying to do is find a way to authenticate the customer," Bruesewitz says. "Through 3D Secure, the actual identification is verified by Visa."
Clearly, there are a lot more resources than in the early days of e-commerce when Bundtzen started out. He averted his crises the old-fashioned way: cross-checking incoming orders through his company's own database and using improved call center screening techniques. In so doing, he's now well below the 1% high-risk credit threshold again.
"It really is'merchant beware,' " says Tom Arnold, CEO of CyberSource. "Small to medium-size e-commerce sites are going out of business" as a result of credit card fraud.
Statistics linking e-merchant failures to credit card fraud don't exist. But some numbers speak for themselves. Meridien Research estimates Internet credit card fraud rates at 10% of all Internet sales in 1999. Without intervention, Internet fraud will have cost U.S. merchants $30 billion by 2005, according to Meridian.
With losses like these, only the mighty withstand.
Deborah Radcliff is a Computerworld feature writer. Contact her at deborah_radcliff@computerworld.com.