An E-Merchant’s Nightmare? Contrary to common belief, e-merchants currently suffer the greatest consequences of credit card fraud and thus have the most incentive to invest in authentication programs.

E-Merchant’s Nightmare

1. The Loss of $ales

• Consumers’ fear of fraud often prevents them from making online transactions.
• Some consumers may cancel their transactions if they suspect fraud.

2. The Loss of Profits

        While quality authentication and anti-fraud technology is developing fast, there is no question that Web transactions still result in more charge backs than card-present transactions. About 0.5% of all online transactions are disputed, compared to 0.1% for face-to-face transactions 

Currently, every time a credit-card holder disputes a charge, the amount is removed from her/his balance and charged back to the merchant, regardless of the claim’s legitimacy.

  By law, consumers are liable for up to $50 charged to their credit cards if they are stolen. But over the past couple of years, the associations have enacted policies that remove any financial burden on the cardholder when disputing an online transaction.

As more consumers make online credit card purchases online, the amount of losses tied to fraudulent Internet payments is bound to increase, according to consulting firm Meridien Research. Meridien estimates that some Internet merchants lose up to 10% of revenue to phony payments.

In a “card not present environment”, merchants do not have guaranteed payment.

A fraud rate of 1% (of gross credit card sales) earns a merchant a “high risk” rating. High risk means high charge back fees to the merchant. And it is those charges, along with return fees to customers and returned merchandise, that can put a company out of business.

About 10% of unresolved charge backs for online merchants that ship merchandise to a consumer’s home are attributable to friendly fraud. Not surprisingly, adult-content sites have the worst incidence of friendly fraud, accounting for about 90% of all charge backs.
As many as 30% of charge backs originating from online purchases of downloaded music and software from Web merchants involve friendly fraud.

Implications for E-Merchants

        While acknowledging that some sectors such as the adult-content industry generate disproportionately high charge backs and fraud, the online merchant community grumbles that the card associations’ relatively new zero liability policies are exacerbating the problem of disputed charges.

Online merchants argue that the card associations endorsed zero-liability as a marketing strategy to soothe consumer fears about credit card account numbers being intercepted when making an online purchase or dealing with a phony Internet merchant. The downside, the acquirers say, is that the policies give the cardholders carte blanche to claim they never made a transaction.

Bibliography

Definitions

• Charge back fee – A percentage of total sales the merchant has to pay the credit card company for the credit card transaction.
• Friendly fraud – the perpetrator’s intent is not to steal, but to deny having engaged on a generally frowned upon activity.