TCS Daily


E-commerce: Good for consumers, bad for business

By James Freeman - March 20, 2000 12:00 AM

Should you use your credit card number on the Internet? Assuming you're ordering from a reputable firm, there's very little risk of a problem. In fact, VISA has just made it even less risky for you to pay with plastic, online or off. The risk is a bit larger for the people who run websites, though, and recent reports suggest that the costs of fraud may be rising. That's bad news for investors in e-commerce companies and could someday become a problem for consumers.

Right now, the news is great for online shoppers. You can enjoy all the benefits of net shopping with few of the problems. That's because you're rarely liable for any fraud that occurs. Typically, credit card issuers limit your liability to no more than $50, and you're only on the hook for that much if you spot a problem and don't report it for two days. On February 22nd, VISA announced that as of April, it is eliminating the two-day rule and creating a "zero liability" policy for consumers, so you won't be liable for any costs related to fraud. This applies to any type of transaction - online, via telephone, or in person.

Why is VISA cutting you a break? Clearly, the market leader with 600 million cards in circulation wants you to keep on swipin'. Consumer confidence is an essential ingredient in VISA's continued success. And there are other reasons. On the same day it unveiled "zero liability," the company also announced that fraud had reached an all-time low as a percentage of transaction volume. In 1999, according to VISA, fraud represented just 6 cents of every $100 of card transactions, down from 18 cents in 1992.

While we may fear that technology allows for more cyber-crime, it also provides new tools to fight it. Neural networks can spot fraud quickly. For example, if you typically use your card to buy groceries in Seattle, a sudden buying binge at luxury stores in Miami will raise a red flag. So new tools exist to combat fraud and VISA is taking the risk off your shoulders. Obviously, you don't want the hassle of dealing with fraud even if the card company ultimately pays the bill. But assuming you exercise even a little judgment when placing an order, you shouldn't fear credit card buying.

For web merchants, it's a different story. They eat more of the costs of fraud than traditional merchants do, because the web guys can't show VISA a signature for each transaction. Basically, the way contracts are drawn, VISA is liable in almost every case where a person walks into a store, presents a card that receives an authorization code and then signs on the dotted line with a signature that matches the back of the card. If the transaction is done on the phone or the web, more of the risk falls on the merchant. Since the web offers more anonymity than even a phone call, there are more opportunities to con e-merchants.

Even on the web, fraud represents a tiny percentage of transactions, but for many sites it's becoming more than an inconvenience. The travel site expedia.com recently announced that it will take a charge in its fiscal third quarter of between 4 and 6 million dollars to cover the cost of bogus transactions. To be clear, this is not a reason to fear using expedia. Although the crooks were using stolen credit card numbers, none of them, according to the company, were stolen from expedia customers. And in many cases online scamsters aren't using anybody's real credit card number. They're generating dummy numbers and fooling the system. But the problem is growing. In an excellent piece for the tech mag Industry Standard, Miguel Helft quotes one credit-card exec saying that fraud is the web's "dirty little secret."

What does it mean for you? As a consumer, there's not much to worry about in the short term. In the long term, if the costs of security continue to rise, then web merchants will have to raise prices. The real issue right now is one for investors. The whole premise of a lot of these e-sellers was that they didn't have any of the expensive "bricks-and-mortar" overhead of traditional competitors. Then companies like Amazon.com figured out that if they wanted to take care of the customer they had to build lots of warehouses, manage lots of inventory, etc. Now it seems that online merchants may have other costs that the corner store doesn't even have to worry about. Maintaining high levels of security is expensive and time-consuming and could represent an increasing challenge on the web. If you're an investor in e-companies, you should definitely consider the costs of cyber-security. And what they will mean for those elusive profits.


Check out James Freeman's weekly column for Forbes.com.
http://www.forbes.com/columnists/freeman/
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