Study: More anti-fraud measures needed

A new report predicts online fraud will cost $15.5B by 2005--a tenfold jump in five years--and says online merchants aren't doing enough about it.

Credit card and debit card fraud could cost online merchants billions of dollars over the next five years unless they implement the technology to detect it, a new report says. The report, released Friday by Meridien Research, warns that as more transactions are conducted over the Internet, online payment fraud will rise in tandem, increasing from $1.6 billion worldwide in 2000 to $15.5 billion in 2005.

Although anti-fraud technology is not foolproof, the biggest factor in the projected increase is that only an estimated 30 percent of merchants use anti-fraud technology, Meridien analyst Jeanne Capachin said. Meridien, based in Newton, Mass., provides research on technologies tied to the financial services industry.

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Last month, a hacker broke into Egghead.com's customer database, potentially exposing more than 3 million credit cards. The company later said the intruder did not gain access to any of the credit card numbers it had on file, but the incident raised fears about the security of using credit cards online and the potential for fraud.

Moriah Campbell-Holt, a financial services analyst with Gomez, agrees that merchants can expect online fraud to rise as online transactions increase in volume, especially as those committing fraud become more sophisticated in their methods. And because online merchants are liable for most fraudulent charges, they have an incentive to try to deter fraud, she said.

Late last year, a number of credit card issuers, including American Express, MBNA and Discover, introduced "disposable" credit card numbers that can only be used once. And credit card issuers have been pushing smart cards, or cards that have a microchip embedded in them containing customers' personal information, for years.

Neither smart cards nor disposable cards have seen widespread adoption rates in the United States, but either technology could help prevent fraud in the future, Campbell-Holt said.

"As rates of adoption of (these) technologies increase, there will be less live numbers out there and less opportunity to commit fraud," she said.

Software solutions
Some companies make software that combats online payment fraud. Their technology ranges from applications that recognize patterns of questionable transactions to systems that look for certain fraud-linked scenarios. One scenario could be a shopper buying something from a Web site for the first time that buys an expensive item and has it shipped to an address that is different from the billing address.

The technology is not perfect, Capachin said. Like antivirus software, most anti-fraud systems are designed for today's threats, she said.

"Something that works great now isn't necessarily going to work as well in six months," she said.

Still, if merchants widely adopted the technology, online payment fraud could amount to just $5.7 billion worldwide in 2005, Meridien says.

Among the leaders in the anti-fraud market are San Diego-based HNC Software and Mountain View, Calif.-based CyberSource, which counts e-tailers Amazon.com and Buy.com among its customers.