Hurt If You Do and Hurt If You Don’t

Online merchants are faced with a number of unfair disadvantages that prevent their online growth.

There is no doubt that selling online brings significant benefits for merchants – increased revenue, access to global markets, improved business administration, and rapid communication with customers – to name a few. But, there is a small glitch. Despite efforts to encourage the adoption of E-commerce by enforcing the benefits it provides, the policies and procedures that govern E-commerce do not favor merchants - particularly in the area of credit card fraud.

While all businesses accepting credit cards must deal with credit card fraud, it is the biggest risk for online merchants. Traditional bricks and mortar businesses have physical access to credit cards enabling them to effectively authenticate and verify the payment process. For example, you are in the process of using your credit card to make a purchase. The merchant swipes your card through a point of sale terminal, which is connected to the merchant’s bank. The merchant’s bank sends this information to your banking institution, which verifies if the card has available credit. If approved the merchant provides you with a receipt that you sign. Your signature is compared to the one on the back of your card.

Online retailers, on the other hand, deal with ‘card not present’ transactions, which means that since the card is not present at the time of sale, it is more difficult to authenticate the purchase. In particular, there is no direct way for the merchant to determine whether the person providing the credit card number is the owner of the card. This challenge opens the door to increased fraud and holds the merchant 100 percent liable for losses incurred as a result of the fraud.

The Costs…

Difficulties in correctly authenticating online purchases have led to a high rate of credit card fraud. According to GartnerG2, in 2001, more than $700 million in online sales were lost to fraud, 1.14 percent of total annual online sales of $61.8 billion. However, in addition to suffering from fraud that is 12 times higher than it is in the physical retail environment, online merchants are getting hit from other sides - namely the cost due to loss of products or services, and fees charged by banks and credit card companies to protect themselves from risks of online selling.

Imagine you are a retailer selling paintings online. The paintings you sell are created by local talent from within your community and have been attracting a lot of global attention. The cost of the paintings ranges between $50 and $500. To ensure customers receive paintings in perfect condition, special care is taken to wrap and package each one. Delivery is also an important consideration and adds to the cost.

You recently sold a painting that was worth $325, plus applicable taxes, packaging and delivery charges. However, now the customer who requested the order is disputing the charge on their credit card statement, arguing he did not order the painting and did not even receive it. You have not only lost the product, but you must also pay for that loss. While laws limit consumer liability to $50 (US), you are liable to eat the entire cost - the loss of the sale, the cost of delivery and packaging, a hefty discount rate that could be between one percent and four percent, a transaction fee around 0.30 cents and a charge back fee of approximately $20. Furthermore, there is also the time it took you to package and send the order, and the time it will now take you to sort out the charge and appropriately manage your cash flow.

Fraud Protection…

To offset the cost of fraud, online merchants are investing in fraud detection procedures and technology. One of the more common fraud prevention tools includes address verification services (AVS), which enable online merchants to check the address provided by the cardholder against the billing address of the credit card. AVS will verify the addresses to see if they match and will send a red flag to the merchant if there is a discrepancy. Another safe guard, that is relatively low-cost and effective, is to check the billing address against the delivery address.

Another method to verify that a credit card is valid is to use the card verification codes on the back of many credit cards. The code is comprised of three or four digits on the back of the card, next to the actual account number. On some cards the code can be found on the front above the account number. Because of its placement on the card, it does not get printed on any receipts. Therefore, if an individual other than the cardholder uses the card number they will not have access to this code, which will warn the merchant of potential fraud.

While merchants recognize the negative outcomes of fraud and can implement a number of low-cost fraud protection procedures, this relatively new market means high prices. As a result, many merchants struggle to find affordable fraud-protection software or services to protect their business.

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Despite efforts to encourage the adoption of E-commerce, online merchants are faced with a number of unfair disadvantages that prevent their online growth. While merchants do have a responsibility to protect their customers and understand fraud issues, it is necessary for policies and procedures that govern E-commerce to be reviewed – in particular the high costs merchants must consume to protect themselves. It is only when laws provide better protection to merchants, and when credit card companies and banks provide more favorable fee structures that merchants will realize the true benefits of E-commerce.

Go to article on Online Consumer Laws.