How Widespread is Credit Card Fraud against Merchants?
Web Commerce Today, Issue 32, March 15, 2000
If you're an online merchant, sooner or later you're going to be stung by credit card fraud. You don't hear too much about this problem, mainly because merchants don't want to let the world know they're vulnerable to fraudsters. Nevertheless, it's a real problem, especially in some industries.
Horror Stories
On March 2, 2000, Expedia.com, of which Microsoft owns 85%, announced a loss of $4 to $6 million from fraudulent credit card purchases from November 1999 to February 2000, about 12% to 18% of sales. It was noticed a couple of weeks into February that a few credit cards were responsible for an inordinate amount of sales, apparently a professional credit card fraud ring using stolen cards. If this can happen to a company as big as Microsoft's travel agency, it can happen to any merchant -- unless you take precautions.
Two years ago, Tom Suhadolnik, founder and then CEO of TheSmokeShop.com, determined that between 5% and 10% of his orders were fraudulent. He gathered all the bogus orders together looking for common characteristics so he could limit his losses in the future.
An early pioneer in sales of downloadable software, Software.net found that as many as 40% of its transactions were fraudulent. They spent considerable time and money developing a system to spot questionable orders before the purchaser was allowed to download the software, so they could have a chance of earning a profit. Eventually they spun off a new company that could apply the same system to protect other merchants: CyberSoft.com
Most Risky Sales
Not all products or industries are so vulnerable to credit card fraud as these examples. I've found that only about 0.01% of orders for Web Commerce Today newsletter are fraudulent, for example. But certain types of e-commerce sites carry a higher risk:
- Downloadable software may cost several hundred dollars, but if the fraud is not detected when the transaction is being made, the fraudster can have downloaded the product and disappeared before the merchant is ever aware of the problem.
- Adult and instant entertainment sites are also susceptible. Adult sites also get a high rate of chargebacks from participants who claim to their wives when the statement comes that they never signed up for the service, that it must have been some big mistake.
- Information sites are also likely to receive some "hit-and-run" crooks.
- High ticket items , such as computers, airline tickets, and diamonds, are prime targets for thieves.
If you aren't in one of these categories, chances are you won't experience as big a problem, though you'll probably have an occasional fraudulent credit card sale.
Fraud Rates
Visa and MasterCard claim a fraud rate of 0.08% to 0.09%, and say there's little difference for Internet sales. But merchants know better. The Internet Fraud Prevention Advisory Council pegs online transaction fraud rates at 2% to 40%, depending upon the product category. US consumers are protected against unauthorized charges of more than $50, and credit card companies deny there is a problem. So it's up to the merchants, who get stuck with the fraudulent sales, to take steps to cut their losses.
