Internet
Fraud Controls can Kill Internet Businesses
A new report
released by Gartner Group, Inc., has found that the average
chargeback rate for Internet transactions with a credit card is 15
percent, and can be as high as 30 percent for merchants delivering
digital products immediately at the time of purchase. As many GS
readers know, the rate for POS transactions is about 1%.
The report,
"Limiting Credit Card Fraud and Chargebacks on the Internet," states
that even e-checks and debit cards offer better user verification.
Credit cards dominate as the electronic payment method of choice for
online shoppers, although this may not be true for
retailers.
"Merchants that do
not address the potential growth in costs associated with Internet
fraud and chargebacks will face losses that will threaten the
viability of their E-business," observes Gartner Group analyst Ken
Kerr. "While a fraud detection system is essential for accurate
credit card verification, a high number of chargebacks on Internet
purchases are the result of customer disputes, not fraud."
In fact, Visa and
MasterCard operating rules may well be their own worst enemy in so
far as getting merchants, particularly mail order merchants,
comfortable with credit cards as a payment mechanism. The story of
one of the nation's most successful online and phone order bicycle
retailers may be a clue to the problem. As part of operating his
business The Pedal Pusher, Frank Walburg sold bicycles and shipped
them all over the country. Often his customers wished to pay by
bankcard. The Pedal Pusher charged the consumer's credit card account
as soon as the order was taken, and generally much before the
products were shipped. In those instances where a custom order, high
value, custom-built bicycle was ordered, The Pedal Pusher charged the
consumer's credit card before shipment, similar to a progress
payment. This was done with the full knowledge of their account
officer at their lender/processing bank. The bank enforced the
Association rules selectively by permitting these exception
transactions for eighteen months and then arbitrarily discounting
them without notice.
The Pedal Pusher
became aware that they had a problem and learned that hitting a card
before merchandise is delivered is a direct violation of bankcard
rules when their bank closed their account, froze their funds, and
for all intent and purposes, put them out of business. After this
experience it comes as no surprise to anyone that today Frank Walburg
would prefer to have his customers pay by check. While the "don't
charge before you ship" rule and the low chargeback level that the
card associations require merchants to achieve is directed at
minimizing card fraud, it is making many online merchants look for an
alternate payment method including eChecks and even ACH.
Interestingly,
some eTailers would gladly pay much higher prices, even as much as
double or triple their current rates, if they didn't have to worry
about losing their card accepting ability or having their business
shut down by some worried bank. In an effort to let eTailers sleep
better at night, some are turning to electronic check payments, and
even promoting checks over cards, to ease the burden of
compliance.
To prevent
chargebacks, the Gartner Report suggests that merchants deliver goods
promptly, provide in-depth descriptions of sale items, provide
customer service contact information, and fully disclose all charges,
including taxes and shipping costs. The report also identifies
several fraud detection methods, including address verification
services, rules-based screening services, card verification methods,
and digital certificate systems. For more information about "Limiting
Credit Card Fraud and Chargebacks on the Internet," access
http://www.gartner.com.
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Copyright © The Green
Sheet, Inc., 1999. All rights reserved.
First Published November 1,
1999