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Anne Lindner

New Visa Policy Aims to Minimize Fraud

19 February 2003

A new Visa rule to be instituted in April could affect the online gambling industry by lessening the opportunity for e-commerce fraud.

The rule has to do with a new program, called Verified by Visa, which enables cardholders to set up passwords that are attached to their credit card accounts. When making purchases online, the cardholder would give the password to the Internet merchant for an extra assurance that the transaction is crime-free.

April 5 is the deadline for all credit card issuers in the Visa network to be able to receive Verified by Visa messages and have systems enabled to facilitate password authentication. As per the program, liability for card fraud falls on the shoulders of the issuing banks, as opposed to the merchants.

Ken Kerr, a senior research analyst with Gartner G2, said issuing banks have a strong reason to want to authenticate Visa transactions with cardholders' passwords because they will in turn be liable for potential fraud after the April 5 deadline. Kerr said the rule is part of credit card companies' move to make online purchasing more comfortable for all involved parties.

"The card companies love the online world because almost all transactions are card transactions," Kerr said. "In the physical world, there are checks and cash in addition to cards. They'd like to see the online world grow, and as long as merchants are hesitant to take transactions from overseas and transactions with various characteristics, it's putting a damper on online purchasing."

One reason merchants aren't as comfortable with online purchasing is that such transactions are known as "card not present" transactions. In other words, there is no one to physically present the card and then sign the receipt in front of the merchant's eyes. Even if the card was stolen, the merchant is covered from liability because the card was presented. In an online transaction, the merchant faces a chargeback if the card turns out to be stolen.

"In the card-not-present world, where you're just presenting a number, the risk is higher and the risk of fraud shifts from the issuer back to the merchant," Kerr said.

Once the April 5 deadline passes, merchants will no longer be responsible for that risk; issuers will. Because chargebacks are a large part of the reason credit card companies initially started resisting online gambling transactions, Kerr said, the new rule could help foster a feeling in the credit card industry that online gambling transactions aren't such a big risk after all; consumers who entered their Verified by Visa password would have a harder time trying to chargeback gambling losses.

Additionally, it will help gamblers feel more comfortable using their credit cards for online gaming purchases because they will have an extra assurance that their transactions are safe.

"In the online gambling space, it will have more impact than anywhere else," Kerr said. "The protection you'll get as a consumer is, if you go to a site which has the Verified by Visa system in place, once you use it once there and you use your password, when you come back to that site again, it's going to ask you for your password. If you can't supply it, it's not going to let you process the transaction."

He added, "They are going to essentially have a signed transaction that says you submitted your password at the beginning of this transaction."

Casey Watson, a spokeswoman for Visa, confirmed that online gambling merchants would be able to enter the Verified by Visa program. She said that so far more than 6,000 financial institutions all over the world are implementing the program.

Kerr said that the fact that this new rule might discourage chargebacks of the kind that turned Visa and other credit card companies away from online gambling transactions a few years ago will probably not be enough of a reason for those companies to welcome back online gaming business. The reason for that, he states, is that now, credit card companies and issuing banks back away from Internet gambling transactions because a law prohibiting payments for online gambling could pass during the current session of Congress.

"The legislative train is heading down the tracks and I don't know if anybody's going to stop it," he said.

New Visa Policy Aims to Minimize Fraud is republished from
Anne Lindner
Anne Lindner