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Mark Grossman

The Achilles Heal of E-Commerce

12 October 1999

A world without credit cards is a world without e-commerce. Yet, credit card fraud online has become a costly problem. A federal law does protect consumers using credit cards, even online. It limits their loss to $50 in case of theft or misuse of their credit cards. The real loser when an online credit card sale goes south is usually This column will teach sellers the basics for succeeding in the world of online credit card sales.

In many ways selling over the Internet is similar to selling over the telephone, via facsimile, or through the mail. With all of these selling methods, you can't verify your shopper's identity, ask for identification or check a signature.

Mail and telephone-based orders have always resulted in more credit card problems than sales made at "brick-and-mortar" shops. This has led to banks charging higher rates to retailers who sell this way.

That's the bad news. The news gets worse for Internet retailers. Statistically, they have even more credit card problems than those in the telephone and mail order business. Credit card chargebacks (a "chargeback" is when the seller's bank reverses a credit card transaction and takes back the money) is the Achilles' heel for e-commerce.

Still, many online retailers fail to take even the simplest precautions.

The Chargeback Process

If you're not familiar with the chargeback procedure, here's a rough summary. When you receive a credit card transaction, your "acquiring bank" pays you. This "acquiring bank" typically isn't paid by the bank that issued the credit card (the "issuing bank") for many weeks.

If the owner of the credit card disputes the charge by saying things like their card was stolen, the issuing bank will refuse to pay the acquiring bank, and the acquiring bank charges back the amount of the transaction plus a fee.

When you're victimized by a chargeback, you not only lose the merchandise and the dollar amount of the transaction, but your acquiring banks will often add insult to injury by charging you a stiff chargeback fee.

Besides outright fraud, another factor that contributes to excessive chargebacks with online transactions is customer dissatisfaction with the product or service received. According to Visa, the number of disputed charges is higher than fraud claims.

You can help yourself here. If e-commerce means 24 x 7 sales, it should also mean 24 x 7 customer service.

When you don't give your customer human and responsive customer service support, they often take their path of least resistance. All too often, it means that they contact their credit card customer service representative to dispute the charge.

In effect, "your" middle of the night customer service is the bank, which simply charges back the transaction to you. When your customer takes this route, it takes away your chance to remedy their dissatisfaction and avoid a costly chargeback.

Protecting Yourself from Chargebacks

So how do you protect yourself from e-shoplifters? How can you lower your losses from chargebacks?

You will need to start with a comprehensive credit card authorization contract for your website. An attorney familiar with e-commerce law and e-commerce transactions can draft this for you. You need to make every credit card customer accept this agreement before they can buy your product or service.

If, for example, you sell a service, your contract might require customers to consent to being charged each month without asking their permission, even if they don't use the service. The contract could also require the buyer to agree to a provision like, "I understand chargebacks will be treated like returned checks. I agree to pay for collection costs."

This is a tricky area of contract law and requires an attorney familiar with this type of "clickwrap" agreement. ("Clickwrap" because the customer typically "clicks" on "I accept" to form the contract.) You may lose a few sign-ups over this, but these customers are likely to be the ones you didn't want anyway.

Next, you must be sure to get your customer's information. You need to get as much as you can without turning them away at the door.

At the least, you should obtain their full name, complete address, and telephone number of where you will be shipping the product. The more you have, the less likely you are to be defrauded.

Bear in mind that the information does you little good unless you verify it. Verification is the key.

One of the first things you should do to verify a credit card transaction is to check the customer's address against the AVS (address verification system), which compiles credit card information from all U.S. banks. You should also verify e-mail addresses. Be wary of free or web-based e-mail accounts. Clearly, you should not accept a successful transaction that follows a string of unsuccessful attempts involving multiple or successive credit card numbers.

Credit cards from foreign banks are even riskier than American-bank issued credit cards. It's imperative that you carefully check cards issued by foreign banks because a large percentage of credit card fraud comes from outside the U.S. Romania and other Eastern European countries are the major culprits. In fact, a recent survey of thousands of Internet credit card transactions originating from Romania and made at Yahoo's online stores revealed only a shockingly small number of the charges were valid! Some companies deal with this problem by simply refusing to process foreign credit card transactions.

Finally, if you ship merchandise, have a detailed shipping policy in place. This policy should include obtaining signatures for proof of delivery. This can help you defend against the "I never got it" routine. Of course, you can't do this if you deliver information or software online.

To decrease disputed charges, make sure that your customer service number is printed next to the name of your business on the cardholder's billing statement. This may encourage the customer to call you to resolve their problems before calling their credit card issuer and initiating a chargeback.

If financially feasible, and I can't emphasize this enough, provide customer service support 24 x 7. If necessary, outsource customer service to companies in the business of providing customer support services.

Realistically, while these verification measures may not be a big deal for sophisticated websites like AOL or, they can be a daunting task for most smaller and start-up online retailers. They simply don't have the financial or technical resources available to implement the necessary anti-chargeback procedures themselves.

For them, the answer may again be outsourcing. They may be best served by using a third-party e-commerce service firm. These companies can often significantly reduce chargebacks due to fraud. Quality firms use extensive, frequently updated databases and complex software for sniffing out fraud, and can even provide around-the-clock customer service (an added bonus for your customers and company image).

If you hook-up with a quality company, outsourcing can be cost-effective because it reduces your losses from chargebacks due to credit card fraud and other disputed charges.

A caveat is in order though. Like your customers, the caliber of e-commerce service companies can vary. Beware of "handcuffing," which is where a company provides credit card fraud protection only if you process these transactions with their bank. Also, be sure their database information relates to your business. If you sell craft supplies to consumers, you wouldn't benefit from a database about corporations.

Becoming informed about your security options is the first step in chargeback prevention. The next is to take a proactive stance to reduce online credit card fraud and customer dissatisfaction. Don't let e-shoplifters shut you out of the promising, rapidly developing world of e-commerce.

The Achilles Heal of E-Commerce is republished from
Mark Grossman
Mark Grossman