Online fraud is twelve times higher than offline fraud

[July 19th 2000]

Fraud on the Internet is taking its toll on e-tailers, who are getting hit not only by Internet fraud, but also by the credit card companies. A new 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."

Links
Gartner		http://www.gartner.com