Interview with the Deepak Dutt, CTO of Zighra

Question: How bad is the problem of Internet credit card fraud?

Answer: The Payment Card industry has these statistics but are very careful about their distribution.  Zighra’s research division has a group that is currently gathering these statistics to support wider release. In the absence of that report I would hypothesize the amount of charge backs/fraudulent orders is only increasing as more people take to the Internet and as more fraudsters and hackers realize that the odds of "getting busted" are pretty low. Though frustrating to businesses, I believe that most reasonably-accomplished outfits can survive with a certain number of charge backs even if it amounts to 3 or 4% of revenue. The problem arises when the "powers-that-be" add insult to injury by demanding a reserve account, or by arbitrarily "fining" merchants for being "bad boys." That's when Internet credit card fraud becomes the seed that spawns a whole garden of trouble.

Question: What percentage of sales goes towards paying credit card-related expenditures: processing fees, chargebacks, fines, and reserve accounts?

Answer: Processing discount rates right now for phone/mail orders seem to have bottomed out around 2.2-2.3 percent depending on the variables involved. Many newer merchants pay as much as 2.57 and even 4 percent, though they can definitely negotiate a lower rate. Most merchants pay $10-$15 per chargeback but some pay as high as $25. A few merchants even pay a bogus $10-$15 fee per ticket retrieval request.

Thus, if you have a $50 sale and the customer has their card fraudulently, you may be slapped with a $15 fee for the slip request, another $25 for the chargeback.. and then even if you reverse the chargeback - some banks charge another $25 to do it. If the customer does a second chargeback, that's another $25. So you can lose your $50 plus pay another $90 by the time you're done - in the worst case scenario with the worst merchant account conceivable!

Merchants can negotiate deals with no chargeback fees - though, generally, this increases the processing discount rate a bit - so merchants need to crunch numbers to figure out where they save the most money - with lower discount fees or with lower or no chargeback fees.

In sum, figure an average of 2.5% paid for processing discount rates, 15-40 cents per transaction (unless you negotiate a no fee per transaction deal), and $0-$25 per chargeback. Chargeback and reserve accounts happen only to "select" merchants, of course! But additional fees sometimes seen are:

Extra charges if the merchant's batch isn't settled every 24 hours;

Additional fees and/or augmented rates for international transactions;

Specific per transaction fees for the type of software being used or to have "the privilege" of checking AVS or CVV2;

Monthly statement fees - unless otherwise negotiated.

Question: Give us one tip or technique on how to avoid charge backs and describe the most widespread frauds.

Answer: Even though it adds a bit of time and expense, the one technique that works best - better than CVV2 verification or any other generic technique touted by MC/Visa - is to verbally verify each order. Just pick up the phone and call each customer, or ideally use our telephone authentication service. Internet frauds enjoy their anonymity and are scared senseless about actually playing their act out over the telephone. Most of them aren't "real" thieves in the sense that they would shoplift from retail stores or perpetrate fraud in a non-electronic scenario. You'll find out who is real and who is fraudulent if you pick up the phone and start calling the phone numbers on your incoming order forms.