The Winners and Losers of Online Payments Fraud
How does payment fraud affect all the players involved?
|By Eran Feinstein
|April 28, 2014 03:04 PM EDT
Online credit card payment fraud is an unfortunate facet of online commerce - and one that is likely permanent. For every safeguard put in place, there is someone willing to find a way to get around it. While the vast majority of online transactions are uneventful, the threat of fraud is always present.
There is no way to be completely safe from credit card fraud. As was made evident in the infamous Target security breach in the United States, where the information of thousands of credit card holders was compromised, and the recent massive fraud case in India, in which one man was found to have stolen money from 4,500 credit cards, fraud takes many forms and can happen in unexpected ways.
So how does payment fraud affect all the players involved? Who are the real winners, and the real losers?
Merchant credit card fraud losses occur mainly on transactions where the card is not presented, such as those done online or in call centers. In 2012, merchants shouldered 37 percent of the burden of credit card losses. Merchants can be especially vulnerable to credit card fraud. If someone purchases merchandise fraudulently, they must often pay back the money to the consumer, and suffer the loss of their merchandise. However, this loss isn't the only way in which fraud can affect a merchant's business.
If merchants fail to act promptly when credit card fraud occurs, or try to save money by cutting corners on fraud prevention technology, they can earn a reputation among their clients as being indifferent at best and disreputable at worst. This can cause distrust and a loss of business.
The credit card company
Credit card companies have safety practices in place to protect consumers, but sometimes they fail. Credit card companies take the lion's share of responsibility for credit card fraud. In 2012, they took on 63% of fraudulent losses. While insurance does compensate for some of the loss, credit card companies are still out a significant amount of time and expense, including the cost of maintaining current fraud prevention measures.
In the United States, there are legal protections for consumers that prevent them from being held liable for fraudulent charges, so buyers are not usually directly affected by credit card fraud. However, all consumers are indirectly affected by credit card fraud, as the credit card companies, who suffer huge losses every year, pass those losses on to consumers in the form of higher interest rates and fees.
If an astute buyer detects credit card fraud, the credit card company will decide whether the cost of investigating the fraud is more than simply compensating the buyer and sending them a new card. Large fraudulent transactions prompt credit card companies to do investigations, which typically involve the police. The police can use detective work, surveillance, and other methods to track down perpetrators. Contrary to popular opinion, the thieves do leave a trail, and they don't always get away with it. Credit card fraud is a felony, and perpetrators can look forward to jail time, plus a permanent criminal record.
What to do to protect yourself or your business
While the prevalence of credit card fraud makes it an unescapable reality for the time being, there are ways buyers and merchants can protect themselves.
Consumers should memorize pin numbers and destroy pin number letters. They should monitor their credit cards continuously for unauthorized charges - not just when they get their statement. When shopping online, buyers should check to ensure that site security measures are in place before entering any sensitive information.
Merchants can also take care to verify the signature and identity of customers before honoring any credit card transactions. They can ask customers for the card verification value number on the back of the customer's credit card, which will at least show that he or she has it in their possession. They can also place a hold on shipments of foreign orders in order to buy time to verify card information and cancel the order if need be.
Finally, and perhaps most helpfully, merchants can use real time credit card processing, which will alert then immediately if a card is lost or stolen, so that they can void the transaction. Better merchant protection is achieved via the use of PCI DSS compliant processing services and platforms; merchants can help ensure they have better protection by inquiring as to how their payment-processing provider manages security and prevents fraud.
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