Monday, January
1, 2001
Retail Internet Fraud Is 12 Times Higher
Than Offline Fraud
E-commerce on retail Websites is the wave of the future.
However, fraud on the Internet is taking its toll on electronic
retailers (e-tailers), who are getting hit not only by
Internet fraud, but also by the credit card companies.
A Gartner survey of more than 160 companies reveals that
12 times more fraud exists on Internet transactions and
that e-tailers are paying credit card discount rates that
are 66 percent higher than traditional retailer fees. Moreover,
Web merchants bear the liability and costs in cases of
fraud, while credit card companies generally absorb the
fraud for traditional retailers (as long as the retailer
follows procedures and saves a physical signature on a
credit card transaction receipt).
Surveyed e-tailers reported that their average credit
card discount rate was 2.5 percent plus about 30 cents
a transaction. The same average for traditional retailers
is about 1.5 percent plus 30 cents a transaction. Therefore,
a merchant may pay credit card processors $2.80 for selling
a shirt online, but pay only $1.80 for the same transaction
in the physical store. Another kicker, according to the
Gartner survey, is that e-tailers spend about four times
more to resolve and process chargebacks than retailers
do.
The bottom line is that e-tailers are getting hit from
all sides. They suffer from fraud that is 12 times higher
than it is in the physical world; they incur the costs
of all disputes and fraud resulting from Internet sales;
and they pay discount rates to the credit card companies
that are 66 percent higher than physical world fees. Furthermore,
e-tailers must pay for Internet payment gateways and fraud
detection, which can add another 50 cents to each transaction.
Meanwhile, credit card companies have failed to offer e-tailers
a cost-effective solution for fraud prevention.
"There is no incentive for a credit card company
to break this unfair fee structure for e-tailers," said
Avivah Litan, research director, Gartner Financial Services. "However,
the credit card issuer that is bold enough to lower the
fees online could create a real competitive advantage on
the Web and possibly gain early market share among e-tailers
and Internet shoppers. In the meantime, several savvy startup
competitors are giving e-tailers alternatives to credit
cards, such as processing that accesses bank accounts directly
or via closed loop systems. At the current rates, those
firms could give the card companies a run for their money."
News Tidbits (appears every day on the front page)
- no tidbits today.
