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Ask any online merchant what the biggest problem with accepting credit cards is and you'll hear the term "chargeback." A chargeback occurs when a customer disputes a charge on his or her bill, often due to unreceived merchandise or disappointment in quality. Even worse, with stringent rules and dispute processes designed to protect consumers, some people use chargebacks as a convenient vehicle for defrauding Internet businesses.
Consulting firm Meridien Research forecasts global online card purchases will reach more than $310 billion in 2005, up from $45 billion in 2000. Meridien also estimates online credit card fraud will cost $9 billion in 2001. Ellen Moriwaki, risk management product manager with electronic payment solutions provider CyberSource, says those numbers recall the early days of credit cards. "Back when credit cards first came out, the fraud rate was incredibly high. Visa and MasterCard put systems in place to help deter fraud. The Internet world still is some way away from the point where the physical world is."
The consequences of racking up too many chargebacks can be dire. In the offline world, where the card and cardholder are present, credit card companies take liability for chargebacks. Not only are fees higher for Internet credit transactions, but each chargeback comes out of the merchant's pocket-along with a fine. Excessive chargebacks can lead to steeper fees and, in severe cases, loss of card-acceptance privileges. For Web businesses operating on thin profit margins, even small fee increases can be detrimental to the bottom line.
Outright fraud is not the only source of chargebacks. Banks are eager to appease their customers, many of whom are still fearful of using credit cards online. The ease with which consumers can successfully dispute these transactions, coupled with dissatisfaction with sight-unseen purchases, has led to many a chargeback at a merchant's expense.
As Steve Paltiel, president, CEO and founder of Third Base Data, has discovered, consumer fears can be as problematic as actual fraud. His Oakland, California, company accepts credit cards on its sports league administration site, Sportability.com. Paltiel regularly deals with customers who fail to recognize the name "Third Base Data" on their bill. Many charge back first and ask questions later. "That's by far the most annoying," says Paltiel, 28.
Credit card companies are making some moves to bring fraud and chargeback rates in the virtual world in line with the offline world. Visa has introduced "Verified by Visa," a voluntary program that has consumers punch in a private PIN number before making a transaction. But that requires users to take an extra step to register their usernames and passwords, Moriwaki notes, so it may be some time before the system is widely adopted.
Meridien Research predicts that widespread use of anti-fraud technology will reduce online payment fraud to $5.7 billion by 2005, down from a potential $15.5 billion. But in the meantime, analysts say Web companies face fraud rates three to four times higher than those faced by offline companies. Growing businesses on tight budgets that can't afford expensive anti-fraud measures must find other ways to protect themselves.
Third Base Data relies on an address verification system (AVS) that matches the ZIP code given by the customer to the ZIP code of the cardholder's billing address. More stringent levels, such as ZIP code plus four or street-level verification, are also available. For growing Internet businesses, AVS is the most popular and affordable type of fraud prevention. "Find a level of fraud protection that you're comfortable with," says Paltiel, "and then be really vigilant about everything."