Consumers could end up footing
the bill for online credit card fraud
By Libby Wells • Bankrate.com

The bad news: If you shop on the Internet with a credit card, you're 10 times more likely to have your account information stolen than if you hand plastic to a sales clerk at the mall.

The good news for consumers: Web merchants are absorbing the cost of fraud -- at least for now.

A recent study by the Gartner Group, a leading provider of business research, found that over 1 percent of cyber-sales transactions involving a credit card are fraudulent, more than 10 times the rate of purchases at brick-and-mortar stores where the buyer and card are physically present.

Because their risks are so much higher, e-retailers pay 66 percent more for the convenience of accepting credit cards than their real-world competitors, according to Gartner. These convenience charges, called "interchange fees," go to card associations such as Visa and MasterCard and to the banks that issue their products.

In addition, Internet stores absorb all the cost of chargebacks, whether they are friendly disputes or outright fraud. About two-thirds of Web stores Gartner surveyed attributed 43 percent of chargebacks to stolen credit cards.

With payments in the tangible world, the card issuer generally assumes that liability as long as the merchant can produce a signed receipt because the issuer authorized the transaction.

Eating into e-profits
"High fraud rates and credit card fees are cutting into already squeezed e-retailer profit margins," says Avivah Litan, research director for payments systems at Gartner.

But digital shop proprietors are not passing along those costs to their customers -- not yet anyway. Virtual buying is still new and very competitive.

"Retailers can't afford to raise prices right now," says Bruce Van Kleeck, vice president of retail operations for the National Retail Federation. "There are all kinds of specials and deals running at e-sites because they are gaining new customers. Currently, fraud and security are just the cost of doing business on the Internet."

What kind of products do computer credit card thieves like most?

"Electronics, video games, high-end commodities," says Van Kleeck. "Merchandise that is easily fenced."

They also lurk around sites that sell books, tapes, cosmetics and clothes -- goods that are competitively priced and draw hordes of credit card customers. The theft earlier this year of data on 300,000 card accounts from the CD Universe Web site exposed the gaping hole in Net security, as well as a lack of concern for consumer safety. Some issuers didn't bother to close accounts and issue new numbers because it would have cost them too much money and time.

Who will pay?
Litan says that unless the card industry develops viable security technology, consumers will begin paying for the consequences of Internet fraud at the checkout counter.

"Merchants have no option but to spend more money implementing effective fraud-protection mechanisms," she says. "And credit card companies must take greater responsibility by endorsing or offering their own fraud-protection solutions and lowering e-tailer fees when they use them."

The Gartner study found that only 40 percent of Web stores are taking meaningful steps to protect themselves from credit card thieves. A major deterrent, especially for smaller Internet merchants, is the cost of buying and implementing the technology.

And the best security methods are often too complex. Litan says e-retailers and consumers have been reluctant to adopt schemes such as digital certificates and PKI technology, which authenticate the identity of both buyer and seller. There are too many passwords, gadgets and additional steps.

"The more effective the method, the more complicated it is to use," she says. "The simpler the solution, the more popular it was with surveyed e-tailers.

"The reality is that Internet merchants have scarce choices when it comes to e-payments because there are no viable and prevalent alternatives -- at least not yet."

Likewise, shoppers have little incentive to use other payment methods on the Internet because credit cards offer the most protection. Federal law limits a defrauded consumer's liability to $50. To spur Internet buying, card associations have gone a step further and dropped liability to zilch for their customers.

Technology to the rescue
Litan predicts that over the next few years, several technologies such as digital wallets and electronic signatures will mature into practical security options for e-buyers and sellers.

"The industry is definitely concerned about fraud and they are spending the money to correct it," she says. "But it's a long haul to implement it. The Internet has really just begun."

For the most part, armchair shoppers enjoy a safe experience at Web stores. The convenience and tax-free status of the merchandise make virtual buying too good to pass up. If 1998 was the year online shopping rose to prominence, 1999 was the year of the big bang, with e-commerce reaching more than $12 billion worldwide.

Van Kleeck believes that as technology improves and risk rates drop, retailers will be able to negotiate better interchange rates with card associations and keep their prices competitive.

He advises consumers to stick with tried-and-true Internet stores that post their privacy policies and security icons in plain sight.

"People need to be cautious and shop at familiar sites," he says. "Technology has made fraud in any venue -- whether it's at e-sites or brick and mortar stores -- easier to complete."

-- Posted: Sept. 11, 2000