Survey: Retail Fraud More Prevalent for Online Vendors

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July 24, 2000 (Computerworld) -- Online retailers get hit by fraudulent credit-card purchases much more often than their brick-and-mortar counterparts do, according to a Gartner Group Inc. study released last week.
But some observers said the problem isn't as dire as the survey indicates, even though all online ventures must pay higher credit-card fees because of that fraud.
Gartner said its survey of 160 companies - half of which use the Internet to sell products - found that the amount of credit-card fraud is 12 times higher online than it is in the physical retail world.
Online retailers pay higher transaction fees to credit-card issuers - 2.5% of a transaction plus 30 cents, rather than 1.5% plus 30 cents - because of the increased level of fraud, according to Stamford, Conn.-based Gartner.
Companies selling via the Internet must absorb the costs of disputes with customers and of any fraudulent transactions they suffer, said Avivah Litan, a Gartner analyst who worked on the survey.
That's because online transactions lack a physical receipt that has been signed by the customer and can later be verified, she said.
Selling online "is a riskier [transaction]," Litan said. "Online merchants eat the cost of all chargeback disputes. But in the real world, if there is a signed receipt, the merchant is off the hook."
Alan Alper, an analyst at Gomez Advisors Inc. in Lincoln, Mass., agreed that it's easier to perpetrate fraud online than in stores. What's needed to prevent it is an online credit-card transaction standard such as the Secure Electronic Transaction specification proposed by MasterCard International Inc. and Visa International in 1996, Alper said.
But that's "dead in the water" at this point, he added. Merchants, not banks or credit-card issuers, pay for online credit-card fraud and don't want to invest in the infrastructure necessary to institute such a standard, he said.
Regular and Substantial Problem
But according to a survey of 736 companies that was released last month by ActivMedia Research LLC, only 3% of all Web businesses experience fraud as a "regular and substantial" problem.
ActivMedia, an e-commerce research firm in Peterborough, N.H., said Web sites most susceptible to fraud deal with higher-risk online populations and sell merchandise that can easily be resold at a high price - products like computers, home electronics equipment and jewelry, for example.
Lands' End Inc. in Dodgeville, Wis., is one retailer that said it hasn't experienced an increase in fraudulent activity since it expanded beyond its traditional catalog business and began selling online.
Andrea Stephenson, a Lands' End spokeswoman, said the company hasn't had problems "with our customer base" and sees no difference in the fraud rates between its online

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