Risky business |
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| Technology | |
| Written by Dan Starr, Executive Vice President, Merchant Services Division, NEOVIA Financial | |
| Tuesday, 23 June 2009 | |
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Industry analysts estimate the annual cost of online credit card fraud to be billions of dollars – in the UK alone, over £300 million was stolen in 2008 through “card-not-present” frauds, up 13% over the previous year. Depending on the type of transaction and industry, recent research estimates anywhere between 3% and 20% of online orders are fraudulent, with costs adding up to 10% of gross online revenue. This poses a significant risk to merchants who are solely dependent on credit cards as their primary method of online payment. You can’t look your online customers in the eyeUnlike face-to-face transactions, all credit card payments that take place online are virtually invisible, labeled in the industry as “Cardholder Not Present” (CNP) transactions. The retailer can neither physically verify the presence of the card, nor the cardholder, which opens the door to fraudulent transactions, resulting in disputed transactions and charge-backs for you, the online merchant. Additionally, the problem with credit cards is that authorisation does not guarantee payment. It only confirms that the card being used has not been reported lost or stolen and that there are sufficient funds available, nothing more. That makes your business susceptible to the risk of bad debt, which means you end up paying the high price of fraudulent transactions. Fraudulent credit card activity can originate from identity theft or customer data hacks on your site and anything in between. Left unmanaged, these threats end up hitting your bottom line. The high price of fraudThe changing online environment together with the push to enter newer, more lucrative markets leaves credit card dependent merchants open to serious financial loss. Fraud, bad debt and identity theft plague the online retail marketplace costing merchants and consumers billions of pounds. And when those fraudsters are hitting you from other countries, it is either impossible or cost-prohibitive for you to do debt recovery. But credit cards are a single-source payment mechanism that offers consumers instant, everywhere convenience. The question then becomes: how do online merchants leverage the core strengths of credit cards while reducing the associated risks of fraudulent activity? Three ways to protect your online businessThere are a couple of different approaches you can take to manage the risk of fraud and bad debt, each with its own costs and benefits: 1. Keep up with ever-evolving credit card security features To combat CNP fraud and disputed transactions, credit card companies have introduced 3-D Secure. It is an authentication protocol that requires cardholders to enter a user-generated password to verify their identity and validate the transaction. Any e-commerce business would be keen to adopt 3-D Secure because it shifts liability away from merchants back to the cardholders and credit card companies. This can mean millions of pounds to some companies and simply peace of mind for others. Security enhancements boost customer confidence, which can in turn increase potential spending activity at your site. But there are some constraints, dubbed as “the conversion killer,” - the additional authentication window that has become a common customer abandonment point. Build identity checking and real-time fraud monitoring systems into your application If you opt to accept credit card payments on your merchant site, the risk is entirely yours. But over the next 3–5 years, the single most important element in fraud detection and prevention will be identification of real-time behavioural profiling. To protect your business from the risks associated with credit cards, you’ll need to build a comprehensive fraud mitigation program which requires establishing business rules, transaction processing, identity verification, KYC (Know Your Customer) and data security practices. 2. Rely on third-party payment processors with indemnified funds to assume the risk for you. More and more merchants are opting to use external payment processors to handle their credit card payments. Today, e-wallets are gaining momentum because they ensure that your customers benefit from the convenience of credit cards without you having to take the risk of bad debt and charge-backs. Merchants integrated with these services are benefiting from comprehensive identity verification, transaction security, indemnified funds and increased consumer confidence. Today, over 100 million consumers use e-wallets to shop online. Known as one of the safest and quickest ways to pay online, an e-wallet provides peace of mind for both the consumer and the merchant. The safest way to payAll e-wallet providers must be regulated and authorised as e-money issuers by a governing financial regulator in order to operate in the EU and most other countries. As a regulated entity, e-money issuers must fulfill all KYC and identity verification requirements, which protect your business from the risks of transacting with unknown, remote customers. Some e-wallet providers also offer 100% indemnified funds, further shielding you from the risk of bad debt problems from CNP disputes and related charge-backs. Comments (0)
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