Internet merchants fight costs of credit card fraud

BETHLEHEM, Pa. — Talk about buyer’s remorse: A man who had purchased a $4,500 custom-made engagement ring over the Internet abruptly called off the wedding just days before the big day — then called his credit card company to get his money back.

He succeeded, but not for long. Ice.com, one of the largest jewelers on the Internet, fought the credit card chargeback, correctly arguing its 30-day return guarantee had long since expired. The customer was out the money.

Payment fraud is a bigger problem for Internet merchants than for bricks-and-mortar retailers because, unlike a face-to-face sale, an online transaction does not require a customer’s signature or credit card imprint.

So it’s easy for a customer to get a charge reversed — and time-consuming for an Internet merchant to prove the sale was legitimate. In most online chargebacks, the cardholder denies ever making the purchase.

The predicament for Internet merchants is compounded because they, and not the card issuers, bear the liability in most fraud cases. It’s the other way around in the offline world.

“It’s a damnable problem for Web merchants,” said David Robertson, publisher of The Nilson Report. The trade publication estimates the rate of credit card fraud to be 18 cents to 24 cents per $100 of online sales — three to four times higher than the overall rate of fraud.

Internet merchants once viewed such chargebacks and other payment fraud as a cost of doing business, mainly because they are difficult and time-consuming to fight. But with fraud sapping hundreds of millions of dollars from online revenues, companies that do all or most of their business over the Internet are increasingly pushing back.

“Merchants are not willing to accept this any more. They are fighting tooth and nail,” said Kathleen Attinello, an executive vice president at Receivable Management Services, which fights chargebacks on behalf of online travel agencies, video game sites and other merchants.

Internet companies are trying to chip away at the fraud problem by hiring companies like RMS, employing technology that spots potential fraud before it happens and using payer-verification services such as those offered by Visa and MasterCard.

Fraud-weary merchants have adopted elaborate procedures for completing a sale, matching a customer’s shipping address to the billing address, verifying that the card hasn’t been reported lost or stolen and checking for any unusual activity on the card.

Card companies are also helping Web merchants fight back, offering payer-authentication services and other fraud-fighting tools and streamlining the process by which chargeback disputes are mediated.

“The rules have changed,” said Tom Sullivan, director of e-commerce risk at travel site Expedia.com and chairman of the Merchant Risk Council. “Internet merchants now have the ability to say, ‘Hey, this person accepted the terms and conditions explicitly, and as a result, shouldn’t be able to charge this back.”

For those fraudulent purchases that do slip through, merchants are increasingly turning to companies like RMS, which last year enjoyed a 42 percent increase in the volume of credit card chargebacks it handled.

The Bethlehem-based company, which has 35 offices in the United States and abroad, has dealt with some goofy online disputes.

A man once tried to reverse the entire cost of his Mexican vacation because he couldn’t get a lounge chair next to the hotel pool. Another tried to reverse the cost of a trip to Hawaii because the hotel room came with a queen-size bed, not a king.

“You would be surprised,” RMS spokesman David Caruba said, “at how many companies in the past would eat something like that.”