Curtailing Credit Card Fraud

By SmallBusinessComputing Staff | Posted December 26, 2002
By Patricia Fusco

Despite increased efforts to curb credit cart fraud, online retailers in the U.S. will lose nearly $500 million this holiday shopping season alone, according to a study conducted by Gartner, Inc. Gartner analysts forecast that $160 million will be lost this holiday season to fraud, and approximately $315 million will be lost in suspect sales getting booted from online systems.

In October, Gartner conducted a survey of 25 U.S. leading online retailers, most of which belong to the Merchant Fraud Roundtable, an organization dedicated to reducing fraud. The survey examined how these businesses are being impacted by fraud, and what the companies are doing to fight online theft.

As online retailers move aggressively to weed out fraudulent transactions, six percent of sales will be rejected, representing a potential $950 million in revenue in the fourth quarter of 2002, according to Gartner's estimates. Online retailers are likely to mistakenly reject about two percent of total sales due to unfounded suspicions and therefore lose out on another $315 million in potential sales. All told, analysts expect that fraud will cost online retailers another $160 million in the fourth quarter of this year.

Aivah Litan, Gartner vice president and research director, said scam artists are getting more brazen, and credit card companies aren't doing enough to help curb unscrupulous activities online.

"Online retailers report that fraud attacks are becoming more sophisticated, frequent, and menacing in nature," Litan said. "Several leading credit card issuers have stopped taking online merchant phone calls in which the retailers request verification of credit card names and addresses when they run across a suspicious transaction."

Litan added that major online retailers are also highly skeptical that new initiatives by VISA and MasterCard to address fraud through the Verified by VISA and MasterCard SecureCode programs.

So what can your business do to markedly reduce losses from online fraud?

Gartner recommends online retailers institute a three-tiered program for managing fraud. First, online retailers should apply real-time checks to look for fraudulent activity based on patterns of fraud abuses. Second, weed out suspect transactions for further manual review. Finally, engage in chargeback recovery system whereby online retailers collect money back from issuers for chargebacks that they wrongly absorbed.

But these solutions also transfer some of the associated costs of fraud to another line item of business operations. So it may be a merry season for the sales department, but the risk management department will be working double overtime.

Building a Smarter Customer
CyberSource reports that 45 percent of online retailers with an offline presence say online fraud sales losses are higher than offline fraud sales losses. Consequently, 45 percent of businesses with an online presence also cite the loss of staff time as the result of online fraud.

One way to help reduce online fraud is to build a smarter consumer. And it's never too late to offer your customers a guide to building safe online shopping habits — no matter what time of the year it is.

Here's a few safe online shopping tips you may want to present to those visiting your website or communicate to existing customers through regular correspondence, such as an email newsletter:

  • Show off your security symbols: Tell customers to look for the lock located at the bottom of your web pages as an indication that they are ordering through a secure web server. Also recommend that customers look for the letter "s" after the "http" in the address line of the site (https//:"), since this also indicates their information is secure.
  • Seek out third-party certification: Some online retailers pay to participate in third-party certification or authentication programs. For example, VeriSign provides its "secure site seal" only to those businesses that have agreed to fulfill a specific security regimen. If your business participates in such a program, encourage your customers to click on the link to be certain the seal is real.
  • Develop good purchasing habits: Recommend that your customers use only one card when shopping online. That way, if someone does obtain their credit card information illegally, the problem will be somewhat isolated. Also, if an online charge is billed to a different card, they will know a mistake was made and can react quickly to report the odd activity.
  • Develop good shopping habits: Encourage your customers to research unfamiliar sites. While shopping at familiar sites is best, if your customers choose to shop at an unfamiliar site, recommend that they conduct a little research of their own before making a purchase. There are plenty of online resources that make it easy for your customers to see if a specific site is on the up-and-up.
  • Provide helpful links: Recommend that your customers report any suspicious activities and if they do suspect a site is fraudulent, report it immediately to the Better Business Bureau or the Internet Fraud Complaint Center (IFCC) at the Federal Bureau of Investigation.

In its 2002 Online Fraud Report, CyberSource estimates that 52 percent of U.S online businesses are losing between one percent and five percent of revenue to online fraud. Next year, make it your mission to curtail credit card fraud.

Minimize your business losses by implementing a cost-effective online security regimen capable of seeking out suspicious transactions. Minimize your potential customers' fears of online transactions by teaching them what they can do to keep protect themselves from credit card fraud. Maximize your customers' loyalty by letting them know what your business does day-in and day-out to provide them with a secure shopping environment.

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