Stop Credit Card Fraud

Accepting credit card orders through your Web site can be costly-unless you're prepared for foul play.

Q: Isit safe to accept credit cards over the Internet?

A: Theanswer to your question requires a discussion of identity theft, asit's the fastest-growing financial crime in the United States,according to federal law enforcement officials. CNN reports that the Social Security Administration alonereceived 30,000 complaints in 1999, up from 11,000 in the previousyear. And the federal government estimates that as many as 500,000people are targeted each year-a threat of such great proportionsthat the Federal Trade Commissionhas launched a special Web site to educate thepublic and inform victims how to respond to identity theft.

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Be aware that consumers generally receive more protection andsupport than merchants in non-face-to-face environments. Whilecardholders are rarely responsible for all the fraudulent chargeson their accounts, business owners-including Internet, mail-orderand telephone-order businesses-almost always get stuck with thebill simply because they're unable to produce the documentationtraditionally required to rebuff disputed transactions.

What's more, financial industry experts estimate that lossesassociated with credit card fraud are in the billions annually.Technology researcher Meridien Research Inc.reports that online consumer fraud cost merchants and consumers anestimated $1.5 billion last year-a number they predict will rise to$9 billion in 2001.

In view of these alarming figures, it's easy to see whyeveryone should approach fraud with renewed vigilance and whycredit card processors are rediscovering the value of preventivecare.

Merchant accounts are equivalent to unsecured lines of credit.To safeguard against enormous potential losses-especially fromhigh-risk businesses, such as Internet start-ups or telephone andmail-order companies-credit card processors have adopted solidrisk-management strategies. Diligent companies scrutinize allmerchant applications, closely monitor account activity, andprovide merchants with the training and resources they need toprotect themselves.

Credit card processor Cardservice International, forone, has a proprietary monitoring system that automatically flagssuspicious account activity, such as sudden spikes in transactionvolume. When abnormal activity is identified, the company'sloss-prevention analysts match sales records with returns andcompare shipping addresses with billing addresses. If necessary,the analysts also contact merchants and cooperative issuers toverify transactions.

Organizations like Cardservice International protect theirInternet merchants by storing card information behind multiplefirewalls at secure payment gateways. This measure provides addedsecurity for small-business owners who may not have the resourcesor technical expertise to prevent advanced hackers from gainingaccess to sensitive data.

To protect merchants, many credit card processors offer anaddress verification service (AVS), which will match shippinginformation with the cardholder's billing address. Whenaddresses don't match, merchants should discuss thediscrepancies with their customers before shipping orders. AVSworks with cards that are issued in the United States; merchantsmust use discretion when accepting cards from overseas issuers.

Finally, merchants should be aware of the potential risks andliabilities of maintaining cardholder data. Internet-based creditcard offenders enjoy relative freedom and anonymity compared totheir counterparts in the brick-and-mortar world. For this reason,industry insiders believe one of the greatest threats to bankcardsecurity comes from computer hackers who attempt to accesse-commerce databases through the Internet. To address the liabilityissue, merchant contracts must explain that business owners areresponsible for the security of the cardholder information in theirpossession.

Tim Miller is COO of Cardservice International and hasmore than 15 years of experience in the credit card processingindustry.

The opinions expressed in this column are thoseof the author, not of All answers are intended tobe general in nature, without regard to specific geographical areasor circumstances, and should only be relied upon after consultingan appropriate expert, such as an attorney oraccountant.

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