Credit card fraud takes swipe at retailers on Internet
Dot-coms must absorb losses because of higher risks, lack of signature

By Paul Davidson
USA TODAY

July 17, 2000

Original article - http://www.usatoday.com/usatonline/20000717/2461762s.htm 

Credit card fraud is rampant on the Internet, undercutting Web retailers already buckling under big losses, according to a study to be released this week by a well-known research firm.

Stolen cards are used in 1.2% of all Internet sales, forcing e-tailers to write off $230 million in 1999, according to a Gartner study. Just 0.06% to 0.09% of traditional sales are phony, making e-tailers more than 10 times
as likely to be victims as bricks-and-mortar stores. 

''This is a huge damper on e-commerce,'' Gartner's Avivah Litan says. ''It hurts their margins, and they have to raise their prices.''

Deborah Williams of Meridien Research estimates online credit card fraud could be as high as 10% of sales; some sporting goods and clothing retailers have told her they have rates as high as 26%. The most vulnerable
Web sectors are computer hardware and software, electronics, and music and game sites. 

Visa spokesman Sean Healy says the credit card giant does not formally track online fraud but estimates it's only slightly higher than its 0.06% incidence of bogus sales overall. 

Litan says most online scam artists cull credit card numbers the old-fashioned way, from trash bins and crooked waiters and sales clerks. 

The Web is a fraud hotbed because the buyer doesn't have to show his face, present a card or sign a receipt. The higher risk forces e-tailers, like catalog and phone-order merchants, to absorb the losses. Credit card
firms typically pick up the tab for the theft for off-line merchants as long as they have a signed receipt. Consumers generally aren't liable for any more than $50 in fraudulent charges on their credit cards.

Web retailers also pay credit card issuers average fees of 2.5% of the sale plus 30 cents per transaction vs. an average 1.5% plus 30 cents for traditional retailers, the study says. And they shell out about $40 a sale to resolve fraudulent incidents vs. $10 for off-line merchants because card issuers make them handle the investigation. ''E-tailers are getting hit from all sides,'' Litan says.

Merchants, she says, are loath to discuss the problem for fear of getting cut off by credit card companies. Circuit City spokesman Bill Cimino would not release the chain's online fraud figures but says, ''This is not an issue for us.''

Expedia's Suzi LeVine echoed that, though the travel Web site set aside $4.1 million last quarter to cover bogus airline ticket purchases made in 1999, which LeVine called a one-time spate. 

A Reno man was convicted last week of charging more than $70,000 in purchases on Amazon.com to 63 fraudulent accounts. 

The good news is that e-tailers are increasingly combating the problem by installing software that checks the address given by the buyer with that of the account holder and flags suspicious activity on an account.

back to top