Credit Card Criminals

Credit Card Fraud Affects YOU

One of the least advertised, but probably costliest issues for merchants, banks and ultimately the consumer is credit card fraud. Banks and credit card companies claim that they are ‘protecting’ consumers by limiting their liability, or eliminating it altogether, but never say who is actually paying for the millions, or perhaps tens of millions, of dollars that are lost each year to fraud. Unfortunately, the answer ultimately is the consumer and the honest businesses.

We constantly read and hear the claims that the ‘protections’ put in place by banks and credit card companies prevent consumers from being defrauded by unscrupulous vendors and scammers, but nobody talks about what protections are in place to protect the merchants themselves – because they are almost non-existent. We are aware of one company that was literally put out of business because of several multi-thousand dollar scams that *they* ended up having to pay for, although they did everything the bank and credit card companies suggested to ‘minimize’ the risk.

What it comes down to is this: The credit card companies require that the buyer be present at the purchase, and that the card be physically ‘swiped’ through a credit card terminal for the sale to be ‘guaranteed’ – and that only after the customer has provided sufficient evidence that they are, in fact, the cardholder. Obviously, this poses a big problem for mail order companies.

The Card Pushers

Credit cards are big business – so big that the entire economies of most developed countries depends upon their usage. Most transactions today involve the use of credit cards, and that percentage will continue to rise. With the advent of debit cards, the percentage of transactions involving bank cards of one type or another will soon likely approach 80% of all transactions between vendors and consumers.

The banks and card companies think this is absolutely wonderful. Merchants must pay fees ranging from 2% to 5% of *each* transaction for the ‘priviledge’ of being able to accept credit cards. Consumers pay very high interest rates on their unpaid balance, ranging from 12% to 25%, and may even pay annual dues. What this means is that the banks and card companies are making billions of dollars every year due to credit (and debit) card usage.

Credit cards are pushed upon us almost on a daily basis. Who has not received at least one ‘pre-approved’ credit card application in the last few months? Sometimes even young teenagers, or even non-existent people, are addressed on these ‘junk mail’ applications. Even with consumer debt going up, the banks and card companies are more eager than ever to issue these cards. Obviously, it must be very profitable for them despite the fact that more bankruptcies and loan defaults are occuring.

Credit Card Accountability – NOT

Unfortunately for the merchant, the credit card companies (most notably MasterCard and VISA) have created a set of rather strict requirements that the merchant must agree to in order to be able to accept the cards. This agreement includes provisions that make the credit card company almost exempt from any kind of fraud or loss, exept where they decide to accept it. In fact, the agreements basically place the entire burden of loss squarely on the merchant’s shoulders, even if the merchant has done *everything* possible to verify the transaction, and does not engage in any questionable practices. Just about the only way a credit card company can lose is if the consumer just doesn’t pay the bill (which is probably beginning to occur more frequently)

I have personally been told by the bank representatives, that a customer can *knowingly* lie about having ordered a product, and the merchant is virtually powerless to keep the money from being returned to the customer. In addition, people can (and do) lie about product being damaged without having to provide any proof other than a statement, and thus get their money returned – even without having to return the product to the vendor, in some cases.

Basically, it works like this. The only way that the card company will guarantee a card transaction is when the cardholder is present when the charge is being made, and actually signs the receipt. In any other circumstance, the card companies offer virtually *no* protection for the merchant. This makes it *extremely* dangerous for mail order companies to do business. We have been defrauded of several thousand dollars this year alone, and have seen other mail order vendors starting to put restrictions on their credit card purchases to avoid getting ripped off themselves.

Who Foots the Bill?

The sad fact is that ultimately the consumer *does* pay for this fraud, even though the credit card companies and banks want to convince everyone that they are *protecting* the consumer. In fact, the card companies are protecting only themselves, while putting the burden onto the merchant. Ultimately, the merchant must raise his prices to offset the additional costs, whether they be incurred from having to perform additional work to prevent the losses, or from the losses themselves.

The technology exists today to prevent a great deal of the fraud that happens. This fraud can range from the thief who steals a credit card (or buys a stolen one) and makes fraudulent purchases, to the person who works in concert with the crooks to provide the card information, then calls the card company with a chargeback saying he never authorized the transaction. Smart cards, and better identification checking are all possible with the powerful computers and networks available.

Unfortunately, this technology is not cheap, so the card companies and banks have no incentive to implement any better verification tools. Even if they did, they would likely charge the merchant for the use of them. Today, an address verification terminal costs about $500.00, and about half of the time it cannot verify the address anyways, so the merchant is forced to call the bank. Sometimes, this information isn’t even available, so the merchant must decide whether to take a chance by sending out the product or not. Even after all of this, if the customer calls back and claims the transaction wasn’t authorized, the merchant loses both the product and the payment.

MasterCard and VISA claim that only 1% of all transactions result in a loss to the vendor, however they are using the statistics from *all* credit card usage, not just from mail order. Obviously it is easier for a crook to fool the vendor over the telephone, so this 1% is more likely 3% with mail order companies. In addition, the purchases with a stolen card are likely to be much larger than those with a valid card, so this raises the percentage of total dollars involved with fraudulent purchases even higher. I would personally not be surprised to find that 5% of all mail order purchases (in terms of total dollars spent) end up being fraudulent. In this business, where profits are very low to begin with, this can be devastating to a company.

When you figure that the average markup is between 10% and 20%, there isn’t much room for error. When you figure in the merchant services fee (3% is average), suddenly there is almost no profit at all – yet the vendor still must pay rent, 800 number charges, employee salary, etc. The cost to the customer can be quite high. For example, a company may be unable to compete and go out of business, which reduces the competition in the marketplace. A company may just decide to raise prices by 2 or 3 percent, or they may put into place very strict guidelines making it difficult for customers to order product quickly.

The Consumer Needs to Speak Up

Anyone who has frequented the newsgroups has seen the numerous postings about people believing they have been ‘ripped off’, and issued chargebacks, or giving advice about purchasing with credit cards so they have recourse. This is actually very good practice, but it only covers one side of the issue. What consumers *should* do, in my opinion, is to complain to the card companies about their ineffective efforts to prevent fraud.

The banks and card companies recently announced that they are removing all liability from the consumer for loss of debit cards, just as they have credit cards (assuming they report the loss within 24 hours). Once again, it is not the banks or card companies that will bear this liability, it is the merchant. At least one consumer advocacy group has denounced this tactic, claiming that the only group that is really protected is the criminal who is using the card.

What I believe the consumer should do is to write their bank indicating that stronger measures to *prevent* fraud should be investigated and put into place. Removing liability after the crime has already occured does nothing to reduce the cost, which the consumer ultimately pays anyways. In fact, even if you have never had your card stolen, you are actually paying for those who *have* had their cards stolen

We at Real World Technologies are very concerned about this issue. In order to protect ourselves and our customers, we are putting into place some tighter guidelines to prevent us – and you – from being ripped off by the unscrupulous individuals. These guidelines include not shipping to *any* address other than the actual billing address without some form of confirmation that can be authenticated – such as a signed statement and picture of a drivers license (faxed in, of course). We also call the banks to confirm cardholder names and addresses. If we cannot absolutely verify that the person calling is authorized to use the card given, we will not ship the product.

We apologize for any inconvenience that this may cause, but it is for the protection of ourselves and our customers. If you feel that this is unreasonable, you should contact your credit card company or bank and suggest that they provide the merchants with a quick and easy way to perform this verification reliably. If enough individuals complain, and the banks actually do implement something that works, we will all benefit – including the banks!!