Online fraud – who loses?


Through successful marketing tactics and a general lack of proper knowledge fully embedded within our culture, the larger credit card companies have tackled any consumer concerns when it comes to liability in situations of fraud and identity theft.  Virtually every new credit card application, offer, or advertisement boasts the authorizing provider’s card security and fraud-proof guarantees.  These guarantees have instilled a necessary confidence within consumers that both enables eCommerce trading and has made the credit card the chosen method in such transactions.

   And while these guarantees may have enabled an entire internet sales industry – one in which your business may actively participate in – you will be surprised to learn that the guarantor is not who you may think.  The guarantor is actually you, the merchant. While most consumers and sellers alike are led to believe that their interests are being protected directly by the card issuing Visa/MasterCard, Discover, or American Express companies, it is in fact these companies’ willingness to exercise their control over a merchant’s depositing account that funds this security.  You will quickly learn that when a situation presented may hint or eventually lead towards fraud (by almost any circumstance,) a hold will quickly be placed in the amount of the transaction in question on the merchant’s depositing account and the burden of proof will then be placed upon them to prove that the cardholder: a) placed the charge knowingly, b) gave authorization to the charge, c) physically received the goods in the conditions presented and made aware to them at the time of purchase, and d) provided a confirmation that the charge was to be applied (ie- signature, etc.)  In instances that seem all too common, proving these points may not even be enough.  Being in the highest risk category (card not present merchants,) online resellers oftentimes receive chargebacks that seem to be un-winnable regardless of the case presented.  With the threat of your accounts being frozen or your merchant processing capabilities closed, it is difficult to argue with whatever ruling is handed down to you.  With the anti-merchant/pro-consumer rules in place, abuses to the system have become a very serious threat.

   Without going too far overboard, one could argue that any losses encountered due to fraudulent activity are felt solely by the merchant.  A consumer who had a charge placed on their account and was later refunded/credited sees no net effect and thus shows little involvement outside of maybe an initial scare or uncertainty.  The fraudster (who could in fact turn out to be the original consumer) obtains whatever item/service they were able to get a hold of at little or no cost or consequence.  The merchant processor may come out the clear-cut winner, however, as they charge the merchant a processing fee and percentage for the original transaction (which is never refunded), follow that up with a substantial chargeback fee (ranging from $10-$50 and again which will never be refunded), and then again charge the merchant the same processing and percentage fees for issuing the credit (again, money that is never returned.)  It would be unfair to suggest that merchant processors actively pursue chargebacks, but there is no denying that the seem to reap benefits from the rules and practices of today.

   It should be said that not every chargeback leads to disaster for the merchant.  While there is never a way around the nonrefundable fee Chargeback Fees, if the actual transaction was valid and you have completed it with the proper authorization procedures, you should have a good case in any chargeback arbitration.  This does not guarantee victory, but it does greatly improve your chances of a favorable settlement.  Al always, it is important to remember to retain as much evidence as possible and to secure these records for evidence in case the need arises.

   While all of the rules seem unfair and set to discourage business, it is quite simply the only feasible way of going about it.  The industry average for chargebacks is estimated to be just above .5% of the total number of transactions with the most predominant reason for a chargebacks being a buyer not recognizing the name of the company they had purchased from on their statement.  This type of chargeback can usually be corrected if in fact the customer ‘recalls’ the transaction after learning more about it.  Unfortunately, though, this information provides little comfort when the threat of a chargeback is received and the products/services have already been delivered.  This makes it all the more important to install systems necessary for detection and to educate yourself to see through a fraudster and to catch them before they succeed in defrauding your company.

   Before, companies were able to take a ‘Circle-of-Life’ approach to distributing the losses encountered due to fraud; the merchant loss leading to increased prices and indirectly being paid for by future consumers.  With eCommerce and customer loyalty not being quite as resolute anymore, a highly sophisticated online shopping populous now has the means and desire to seek out the lowest prices and is more than willing to jump to another supplier at any time.  A key to driving your prices down is to minimize the many external factors and overhead costs that are not keyed directly in to the buy/sell transaction.  Fraud may very well be the largest of those external factors and can be devastatingly unpredictable.

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