Net Lossesross Gittins

Sydney Morning Herald

Tuesday June 14, 2005

Ross Gittins, Ross Gittins is an economics columnist for The Sydney Morning Herald and The Age.

Selling via the internet is a good way for many small businesses to increase their sales. But you've got to know what you're letting yourself in for.

The incidence of credit card fraud is quite high. And, unlike over-the-counter credit card sales, the cost of online fraud is borne by

the business.

The Australian Institute of Criminology has conducted a study of online credit card fraud against small businesses, using a survey of almost 1100 companies. It focused on five types of retailer most likely to engage in

online trading: florists, booksellers, record retailers, toy and game traders, and computer hardware retailers.

The survey found 13 per cent of small businesses were trading online, with more than three-quarters of the remainder planning to start within the next two years.

Almost all of the online traders were satisfied with the practice and intended to continue. More than half said it had significantly increased their sales.

For 70 per cent of online small businesses, internet sales accounted for up to 10 per cent of their turnover.

Overall, a third had been a victim of online fraud, with the incidence varying from a quarter of music retailers to 43 per cent

of booksellers.

About 12 per cent of florists and 22 per cent of booksellers had been victims in the past year. Half of all those who'd experienced online fraud had suffered more than one incident in the past two years.

But 18 per cent of fraud victims accounted for 38 per cent of all incidents.

The average size of the annual losses suffered by traders varied by business, ranging from $100 for music retailers to $3500 for booksellers. In 2002, only a fifth of the incidents of fraud were reported to police.

Credit card fraud may involve the use of lost or stolen cards, or the appropriation of other people's credit card numbers, including those copied from their discarded receipts.

When credit cards are used over the counter, traders are protected against loss in the event of fraud. But when cards aren't present for the transaction - as is the case not just online but also with telephone, mail and fax transactions - traders are responsible for the loss.

According to the survey, the traders who are most aware of this reversal of responsibility are those who've been victims of fraud. Those least aware have never sold goods online.

So it's clear the rules are not sufficiently well understood by retailers. It's equally clear online traders don't do enough to protect themselves against fraud until they've been a victim of it.

The first line of defence is electronic authorisation from the cardholder's bank. This involves verifying that the credit card being used to buy the items is valid and has sufficient funds attached to it.

However, it provides no assurance the person using the card number is authorised to make the purchase.

One partial solution is to request the online customer to enter the card verification number - a three- or four-digit number printed on the back of the card. This reduces the scope for fraud by people who have the card number but not the card.

According to the survey, only a quarter of online traders conduct the electronic authorisation process automatically while the customer waits online. About two-thirds process the authorisation manually - by using an Eftpos terminal or by phoning the cardholder's bank - before dispatching the goods. About 8 per cent of online traders never use electronic authorisation.

Traders are urged to add manual methods of fraud prevention to electronic authorisation. They should be suspicious of orders for multiple items (they may be sold on), orders placed in a rush or for immediate delivery, cards that have been used previously and found to be fraudulent and customers who provide an email address from a free provider.

About half of online traders always phoned or emailed the customer to confirm the order, 40 per cent kept a database of good and bad customers, 30 per cent always rejected suspicious orders and 12 per cent always checked customer details in the phone book.

When fraud occurs, it's rarely discovered by the traders. They're almost always advised of it by their bank, with the advice coming in the form of a "chargeback" - the amount of the transaction the cardholder disputes is credited to the cardholder's credit card statement and withdrawn from the trader's bank account.

But because the fraud-detection process is initiated by the wronged cardholder, the delay before the trader who bears the liability is notified can be lengthy - two months or more for half of the victims. This can mean a trader accepts several transactions on the dud card.

Obviously, the banks should try to streamline this process. But equally, traders should be trying harder to guard themselves against being defrauded.

© 2005 Sydney Morning Herald

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