Net Profits

Entrepreneur, Dec, 1999 by Melissa Campanelli

Scram, Scam!

If you sell on the Web, know that fraud is part of the e-commerce game. Don't let thieves get the best of you.

Keith Peer, owner of Central Command Inc., knows all too well the risk of doing business on the Web. An online software merchant near Cleveland, Central Command offers antivirus software to consumers who have been attacked by hackers, crackers and other online scammers. Before Peer set up his Web site back in 1994, he took several precautions to make it as virus- and fraud-free as possible. His first step was to choose an e-commerce vendor whose system came complete with software to check for fraud.

Peer also did some checking of his own, keeping a close eye on two kinds of buying activities that could indicate fraud. One indicator was the purchase of multiple licenses without testing the software. (It's common practice for software buyers to download a free trial version before making a multiple purchase.) Another indicator consisted of orders from areas with high incidences of fraud, such as Miami, Los Angeles and former Soviet Union countries. In both cases, he'd check and recheck credit card numbers to ensure they were legitimate.

Today, Peer's Web site is virtually fraud-free, but he still hasn't let down his guard. "As soon as we went online, we started experiencing attempts by consumers to use fraudulent credit card numbers," says Peer, 33. "And we still see the same traits over and over. It's an ongoing problem, but it's a fact of life in the e-commerce world today."

LIKE WILDFIRE

Indeed, fraudulent "card not present" transactions are common-place on the Internet. Here, scammers obtain credit card numbers from stolen, used credit card slips and then make purchases online. When the credit card owner receives his statement and disputes the transaction with his bank, the bank requires the merchant to provide a proof of purchase with a signature. If the merchant cannot produce a signature, the.bank awards a chargeback, which credits the consumer's account and debits the merchant's account.

Some people who appear to be legitimate customers might actually be scammers who purchase products with credit cards and then dispute the charges, hoping to get their money back while keeping the merchandise they've purchased. In these kinds of cases, the merchant loses both merchandise and money and may even incur a chargeback fee.

"Merchants are 100 percent liable for every credit card transaction they accept, and they have very few rights in the event of a chargeback where there is no signature," says Steve Peisner, president of Shared Information Systems Ltd., an identity fraud and electronic shoplifting detection consulting firm.

Web merchants with a high incidence of fraud or more than 1 percent of chargeback rates have been barred by card issuers from accepting credit card transactions at all. Many Internet merchants have had their merchant privileges suddenly revoked, putting them instantly out of business. "If you get a lot of chargebacks, that suggests your business isn't legitimate," says Audri G. Lanford, an Internet scams expert and co-editor of the newsletter Internet ScamBusters. "Since all these people are claiming there is a problem with their orders, your business can be perceived negatively."

DON'T GET CARDED

Despite the statistics, you can easily prevent your company from becoming a victim of credit card fraud. Besides taking extra steps to validate each order (see "Busted!"), check out the plethora of Web-based services that help combat fraud. Peer employed a fraud-detection service from NetSales Inc. (www.netsales.com) that detects the possibility of fraud and prevents fraudulent orders from entering your system. Other companies that offer similar services include CyberSource Corp. (www.cybersource.com), HNC Software (www.hnc.com) and Shared Information Systems Ltd. (www.nochargebacks.com).

Here's how these services work: After a consumer types in his or her card number and address information, it's checked against a database of credit card transaction information to see if the card has had any negative activity associated with it. It also checks for risk components, such as where the transaction originated and how often the customer has used the credit card in succession. The system then generates a score that indicates the probability for fraud. It's possible to set thresholds at which these systems either accept or reject transactions according to a certain score. You can also set them up to obtain additional information, such as why a card was rejected. All these fraud-prevention companies claim that they can cut down your fraud rates to extremely low percentages. To enlist a company's services, it'll cost you around 5 cents to 40 cents per transaction, along with a onetime sign-up fee of $1,000 to $1,500 and a monthly service fee of about $100 to $200.

BUT WAIT, THERE'S MORE

While these security measures may seem a bit extreme, they're essential to your company's survival, considering the current chargeback statistics: A recent report from IT research firm The Gartner Group indicates that approximately 15 percent of orders made on Web sites result in chargebacks, compared with 1 percent from point-of-sale transactions.