Fraud-prevention measures for online payment systems could become more than an afterthought to many e-tailers when the Web holiday sales surge hits full stride and transaction volume levels rise.
Despite being squeezed by higher credit card fraud rates and fees as much as 18 times higher for virtual transactions than those in the physical world, many online retailers struggle to find affordable fraud-protection software or services alternatives, said Avivah Litan, an analyst at Stamford, Conn.-based market research firm Gartner Group Inc.
"It's like a schizophrenic story. It's their No. 1 concern, but it's the bigger companies who can do something about it," Litan said. "Sometimes the cost of implementing these systems is higher than [credit card] fraud service and, depending on the price guarantee, small merchants might not want to buy it."
According to Litan, online merchants pay credit card companies an average fee of 2.5 percent of every transaction as well as a fee of between 20 cents and 30 cents. E-tailers must absorb all charge-back costs -- as much as four times more than physical world costs -- and pay 22 cents per transaction for fraud protection using transaction-risk scoring services.
CrediView Inc., a Menlo Park, Calif.-based ASP (application service provider) start-up, launched this week and joined ClearCommerce Corp., CyberSource Corp., Digital Courier, and Mindwave Software as providers of transaction-risk scoring solutions, but with a unique twist.
The company's eCredible Guaranteed service guarantees users 100 percent against any charge back if it rubber-stamps the transaction, said Ron Rymon, president and CEO of CrediView.
CrediView's eCredible Guard service, based on a per transaction or fixed monthly fee, provides calculated risk scores to the merchant for approval -- without a guarantee.
Experts say online merchants are helping themselves by gradually building up their defenses against Internet credit card fraud.
"They are looking for certain red flags, verifying addresses, looking for certain behaviors that are tip-offs to fraudulent transactions," said Barry Parr, an analyst at International Data Corp.
But Egghead.com Inc. is confident in its internally developed, everyday fraud-detection measures and is not adding anything else for the holidays.
"Every transaction goes through the mechanism and looks at [it] as if the consumer has done a fraudulent transaction before, determines whether the credit card is fraudulent, and looks at other factors," said Leslie Benson, senior vice president of finance at the Menlo Park, Calif.-based online retailer.
However, no procedure is perfect for online payment systems that electronically identify the potential buyer.
"If it's a card-not-present transaction, you can see how there is a greater likelihood for fraud," said Scott Silverman, vice president of Internet Retailing at the National Retail Federation, in New York.