Internet fraud impacts merchants, consumers

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    BY ALLISON POND

    The grapevine is clogged with stories of unfortunate consumers getting taken for a ride through the information superhighway’s shopping malls, and current statistics from online consumer and fraud reporting agencies support the rumors.

    The National Consumers League reported last month that their site received 10,660 reports of Internet fraud in 1999, almost ten times the number in 1997.

    But consumers aren’t the only ones losing money in the new online economy, and they aren’t the ones losing the most.

    Expedia, an online travel service company, announced Wednesday that purchases made on its site with stolen credit cards would cost the company $4 million to $6 million to cover. The company is one of many eating the cost of fraudulent Internet transactions.

    Under the fair credit billing act, consumers have no liability if their card is lost or stolen, or if charges appear on a bill where the card was presented and never received, said Holly Anderson, spokesperson for the National Consumers League.

    Anderson also said if a consumer orders, for example, a computer, but receives an empty tower instead, he can dispute the charge by calling the number on the back of his bill. The credit card company then has 90 days to investigate, and if the story checks out, the card holder is off the hook.

    So, for the consumer, using a credit card online is actually a way to protect himself from fraud.

    The merchant, on the other hand, is the one left holding the bag if someone uses a stolen credit card number to order something from their site. The consumer refutes the false charges, but the item has already been shipped to the crook, and the merchant takes the hit.

    William Donahoo, Vice President of Marketing for CyberSource, said that this is the case in online transactions because the card itself is not presented.

    “In a card-not-present environment, the sole responsibility is on the merchant. It is up to them to find ways to reduce fraud,” he said.

    “Someone’s got to bear the risk, and today the merchants bear it. When the card is not present, the risk is high enough that banks can’t take it,” Donahoo said.

    A survey conducted by CyberSource reported in November that 75 percent of online merchants consider fraud to be a problem, and 62 percent view it as a serious problem. Respondents estimated that on average, 5 percent of total transactions over their system are fraudulent. This figure ranged from 0 percent to more than 25 percent. They also expressed frustration at the lack of adequate controls from credit card companies and the government.

    To address the problem, several internet scam reporting sites give tips to merchants on how to pick out potential fraudulent transactions. One of these, Scambusters.com), encourages online businesses to take extra time to validate addresses and be wary of orders with different “bill to” and “ship to” addresses. Online merchants should also be on the lookout for orders that come from free e-mail services, where it’s easy for a scamster to open a free anonymous e-mail account in another person’s name, the site says.

    Paying extra attention to international orders and orders that are larger than usual, finding out the name and address of the bank that issued the credit card, and calling or writing the customer for additional information before shipping are also methods Scambusters suggests for minimizing fraud.

    The online community is also using technology to combat fraud. One example of screening software is CyberSource’s Fraud Screen. Donahoo said CyberSource developed Fraud Screen, a program that looks at data such as name, address, credit card number, and location of the computer from which the order is being placed in order to determine a risk score for each transaction.

    For instance, when the bank that issues the credit card is in Arizona but the computer’s IP address is in Poland, the risk score is higher, Donahoo said. The time of day and type of product also has an impact. An order for 16 copies of Microsoft works at 3 a.m. would have a higher risk score than buying 16 CDs from CDNow in the middle of the night, Donahoo said.

    On the consumer side, education is an effective way to avoid scams, Anderson said.

    “Ignorance is the biggest factor in online fraud,” she said.

    If there’s one tip I could give consumers over and over and over, it’s to pay with a credit card. Sixty-nine percent of consumers think it’s safe to pay with a check or money order, and that’s not true,” Anderson said.

    “Checks and money orders are gone by the time they realize they’re not getting the item.”

    Anderson said 92 percent of all people who reported fraud to NCL in 1999 paid with something other than a credit card. “I think that’s startling. If those people paid with credit cards, they would be protected, and they wouldn’t be complaining.”

    Eighty-seven percent of consumer fraud occurs at online auctions because most of the transactions happen individual to individual, Anderson said.

    “Sellers don’t usually accept credit cards, so you’re dealing with a person in Ohio and a person in Florida, and the buyer will send a check or money order and never receive the item,” she said.

    Anderson said the seller is liable, but it is nearly impossible find them with only an e-mail address and a P.O. Box, and law enforcement doesn’t get involved until they fraud a lot of people, especially with the complications that come when transactions cross over state and even national boundaries.

    Those who run auction sites have no accountability, Anderson said.

    “eBay and Yahoo are not responsible for what happens. Should they be? We think somewhat, yes. There should be some amount of responsibility on the auction house. They could offer an escrow service and require everyone to use it,” Anderson said. They don’t, however, she said, because it would cost them money.

    Buyers can complain if they are scammed, but that doesn’t guarantee anything, Anderson said. Bad feedback can get a seller thrown off if a certain number of complaints against them come in, but some fraudsters have up to 15 registered addresses and can use them to complain against someone else and get them thrown off, she said.

    “These people are smart. They know how to manipulate the rules of the site.”

    Aside from auctions, the most consumer fraud occurs on general merchandise sites.

    The Internet community has developed other technologies that help, including an encryption technology known as secure socket layer. Howard Lane Gift Baskets explains this technology in their secure shopping statement for customers, a feature that many online businesses are providing in an attempt to inform and reassure potential buyers. They compare sending information on the Internet to writing something on a post card that anyone could read. Encrypting the information essentially puts it into an envelope so others can’t read it. When this technology is in place, the site’s URL will begin with https:// instead of the usual http://, the statement says.

    Anderson also gives some tips for consumers to avoid being taken. She suggests that consumers wary of online shopping not avoid it, but start with “click and mortar” sites-sites of companies that exist on the Internet and in buildings, making them easier to track down.

    Scambusters’ site suggests not buying things learned about through bulk e-mail (spam), not conducting business with an anonymous user, not sending payments to a P.O. box, being more cautious of users with free web-based e-mail accounts such as hotmail or yahoo, and documenting the transaction.

    The site also tells consumers, “Use common sense and trust your intuition. If you have a funny feeling about an item, don’t buy it. You’re very likely right that it is counterfeit.”

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