Gartner Survey Sparks Debate on Net Retail Fraud

FRAMINGHAM (07/18/2000) - Gartner Group Inc. yesterday released the results of a survey showing that online retailers get hit by fraudulent credit-card purchases much more than their brick-and-mortar counterparts do. But some observers said they aren't sure the problem is as dire as the survey indicates.

Gartner said its survey of 160 companies -- half of which use the Internet to sell products -- found that the amount of credit-card fraud is 12 times higher online than it is in the physical retailing world. Online retailers also have to pay higher transaction fees to credit-card issuers because of the increased levels of fraud, according to the Stamford, Conn.-based consulting firm.

Companies selling via the Internet also must absorb the costs of disputes with customers and of any fraudulent transactions they suffer, said Avivah Litan, a Gartner analyst who worked on the survey. The reason, she added, is that online transactions lack a physical receipt that has been signed by the customer and can later be verified.

Selling online "is a riskier [transaction]," Litan said. "Online merchants eat the cost of all chargeback disputes. But in the real world, if there is a signed receipt, the merchant is off the hook."

Alan Alper, an analyst at Gomez Advisors Inc. in Lincoln, Mass., agreed that it's easier to perpetrate fraud online than in brick-and-mortar stores. What's needed is an online credit-card transaction standard such as the Secure Electronic Transaction (SET) specification proposed by MasterCard and Visa in 1996, Alper said.

But that's "dead in the water" at this point, Alper added. Merchants, not banks or credit-card issuers, pay for online credit-card fraud and don't want to invest in the infrastructure necessary to institute such a standard, he added.

But according to a survey of 736 companies released last month by ActivMedia Research LLC, only 3% of all Web businesses experience fraud as a "regular and substantial" problem. ActivMedia, an e-commerce research firm in Peterborough, N.H., said Web sites most susceptible to fraud deal with higher-risk online populations and sell merchandise that can be easily resold for high value -- for example, products such as computers, home electronics equipment and jewelry.

Land's End Inc. in Dodgeville, Wis., is one retailer that said it hasn't experienced an increase in fraudulent activity since it expanded beyond its traditional catalog business and began selling online. Andrea Stephenson, a Land's End spokeswoman, said the company hasn't had problems "with our customer base" and sees no difference in the fraud rates between its online site and the catalog operations.

Andrew Bartels, an analyst at Giga Information Group Inc. in Cambridge, Mass., said some of the larger and more established online retailers have already installed software to detect Internet fraud. And companies that came to the Internet from the brick-and-mortar world have also invested in the technology needed to combat fraud, he said.

"But it's the start-up dot coms that are more focused on getting their business going than on fraud protection," Bartels said.

According to the Gartner survey, online retailers typically pay transaction fees to credit-card issuers that are 66% higher than what brick-and-mortar companies are charged. For example, Litan said, a merchant might have to pay a fee of $2.80 for selling a shirt online, while a traditional retailer would only have to pay $1.80 to process the same transaction.

Credit-card issuers Citibank and Capital One didn't return telephone calls seeking comment on Gartner's claims.

Litan said online merchants should do what they can to decrease fraudulent transactions by investing in software designed to detect Internet fraud.

However, she said that many companies have been unwilling do so even though fraud "is eating into their profits and causing them to be unprofitable."

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