Online Credit Card Fraud

Because online retailers cannot obtain the signature of a consumer paying by credit card, they face a significant problem of fraud losses by individuals using stolen credit-card numbers. Take the case cited recently in the Wall Street Journal. A retailer received an online order for a book to be shipped to an address in Morocco, with the cost to be charged on a bank credit card. However, when the holder of the credit card found the charge on her bill, she denied any knowledge of the order. She obviously did not want to pay for the book. While the retailer could prove that he had shipped the book, he could not show the bank that he had obtained her signature. Since he had not shipped the book to the cardholder's billing address on the credit card, he did not have her signature on the order or delivery slip. The end result: the bank charged back the cost to the merchant.

Credit card fraud appears to plague large retailers in particular. In a survey of 250 top retailers with median annual revenues of $250 million, Gartner, Inc., a market-research firm, found that 2.6% of their online sales resulted in charge-backs versus only 1.2% of offline retail transactions. With online retail sales of $61.1 billion (estimated by the Boston Consulting Group), even a modest 1.75% credit-card fraud rate would generate about $1.07 billion in charge-offs.

Online retailers are taking a number of steps to curb their fraud losses. Card Commerce International has a large database of credit card numbers that have incurred charge-back orders. Some retailers will accept an online order only if the item is being shipped to the cardholder's credit card address. One retailer calls every cardholder that orders more than $100 of goods. Others have developed fraud-control scoring systems that identify potential fraudulent orders. For example, a firm selling airline tickets online found that consumers ordering costly airline tickets at the last minute were more likely to be engaging in fraud.