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E-Tailing's Dirty Secret

Internet retailers are tallying revenue after their most successful holiday shopping season yet, but a dirty little secret lurks behind the numbers - regular occurrences of credit-card fraud.Consumers have finally lost their fear of using their charge plates online, but merchants are just waking up to the reality that a hefty percentage of their transactions may actually be theft.

Internet retailers are tallying revenue after their most successful holiday shopping season yet, but a dirty little secret lurks behind the numbers - regular occurrences of credit-card fraud.

Consumers have finally lost their fear of using their charge plates online, but merchants are just waking up to the reality that a hefty percentage of their transactions may actually be theft. Crooks are taking advantage of the Net's anonymity to use stolen or faked credit-card numbers to buy goods. The tricks aren't new, but clear substantiation of the trend is.

include($DOCUMENT_ROOT."/templates/talkback_box.htm"); ?> A recent study from Meridien Research estimates that some online retailers are suffering from credit-card rip-offs to the tune of up to 20 percent of sales. The report predicts that if unchecked, credit-card fraud could cost cyberstores US$15 billion per year by 2003.

But unlike the heavy PR campaigns waged to win consumer trust in using credit cards online, merchants and banks are sharing a complicit silence in the face of theft by unscrupulous customers. Clearly, online retailers would rather deflect attention from an embarrassing problem in an industry sector that is still largely profit-free, and credit-card issuers are disinclined to discuss a sensitive topic that bluntly points up the shortcomings in their primary service offering.

American Express has declined to divulge any figures on online fraud vs. face-to-face credit-card transactions. MasterCard officials have waffled, but they have admitted there are "problems" with card-not-present (CNP) transactions on the Net. They have emphasized that the issue is an old one and a perennial problem for catalog companies that has yet to be fully solved.

The overall fraud rate for credit-card transactions has been holding steady at about 8 basis points, or 8 cents per $100 in sales, over the past few years. But CNP fraud rates routinely run up into the double digits and always carry a higher transaction fee to merchants. At first glance, the higher rate might seem justified, but when a deal goes bad in a CNP transaction, the merchant - not the issuer - must eat the loss.

So far, Visa is the only card issuer to fully admit - and perhaps track - that there is a higher rate of fraud in online transactions: 0.09 percent vs. 0.07 percent for real-world purchases. The company also said that number is remaining steady.

The newly formed Internet Fraud Prevention Advisory Council, which currently is polling online merchants to get a better sense of just how bad the credit-card problem is, said it will have some definitive answers by March. There is general agreement that smaller, less sophisticated sites are taking the brunt of the fraud because they don't have the proper screening software to detect fishy credit-card transactions.

In the end, the real villain of online shopping is the crooked consumer. An increasingly common scam is to order goods on a legitimate card, take delivery and then call the credit-card issuer and say the purchase was an "unauthorized transaction." Even with a delivery signature from FedEx, the issuer must charge back the item to the merchant. The only way to prove the customer is lying is to get a search warrant to look for the item, said Allen Jost, vice president of EHNC, a division of HNC Software.

Most cybershops would rather write off the loss than go to the trouble and expense of chasing a thief in another part of the world for a US$2,000 laptop computer.