Online Payments and Fraud: What You Don’t Know

From my debut article in Direct Selling News: Online Payments and Fraud: What You Don’t Know Could Cost You Millions

As network marketers position their businesses for global e-commerce expansion, they’re finding there is no such thing as business as usual.

According to a recent trend report from eMarketer, smartphones are making mobile shopping easier and more efficient, and that will not only translate to an increase in mobile buying but also drive up the number of inbound calls to businesses. Get ready. As mobile commerce rises so, too, will online fraud. This has huge implications from an accountability and responsibility standpoint, especially in Europe. In other words, caveat venditor—let the seller beware.

Two major shifts in the last quarter of 2015 drastically changed the liability for protecting consumer information online. First, the mandated implementation of EMV chip cards in the U.S. last October moved fraudster attacks from in-person to online stores. Second, the nullification of the Safe Harbor agreement between the European Union and the U.S. Department of Congress upended long-standing best practices for data handling and security. To better understand the depth and impact of these global game changers on the future, we need to take a step back and review the histories as well as present implications.


EMV Chip Cards Escalate Online Fraud

In 2002, European merchants began the migration to chip cards and EMV became the standard for chip technology across the pond. While international travelers worried less about their credit cards being cloned and counterfeited during in-person transactions, online fraud rates soared, increasing 97 percent between 2004 and 2008, according to Bank of International Settlements, Financial Fraud Action, BI Intelligence.

With the implementation of EMV chip cards in the United States last October, the liability for fraudulent transactions shifted from the issuing bank to the merchant. Although EMV technology makes in-person transactions safer, online merchants can’t accept chip and pin cards, yet they still have 100 percent liability for Internet fraud.

The impact to network marketers is significant when you consider that the estimated rise in fraudulent transactions for companies doing business online is now over 40 percent. Couple that with the fact that nearly 80 percent of online merchants weren’t prepared or weren’t knowledgeable enough to put in system security measures to authenticate a transaction. And penalties for businesses include being placed on the card association’s excessive chargeback list and incurring additional fees per transaction.

In addition, businesses that rely on autoship revenue can expect to have increased declined transactions, which can result in lost business. Anticipating these increases and fraud losses, bank card associations and major merchants have been working toward anti-fraud solutions.

Risk-Based Approach to Authentication Is Key

Authentication describes a process where the card holder’s identity is verified in “real time” by the merchant. Although the process is not new, the technology driving it has improved drastically over the last 24 months. This is a win-win-win for issuers, cardholders and retailers.

The leading solution that protects online merchants from high declines, fraudulent transactions and increased fraud chargebacks is the authentication protocol 3D Secure. Services based on this protocol have been adopted by Visa (Verified by Visa), MasterCard, (MasterCard Secure Code), American Express (SafeKey) and JCB International (J/Secure).

This additional security layer for online credit and debit transactions gives merchants more control over the approval process and protects them from fraud losses. For issuers it reduces fraud rates, and for cardholders it’s a safer, more efficient online checkout process. Bottom line? More transactions, higher conversion rates and increased sales equal satisfied customers. Not to mention a reduction in customer support calls, which translates to reduced costs.

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