commerce markets are at greater risk of fraud as well. The instant delivery and anonymity behind the sale of digital goods, such as pornography, software or digital currency, makes them more attractive to fraudsters. Similarly, sites that sell goods that can be easily converted into cash, such as consumer electronics, will typically be more prone to fraud.
But Internet fraud can be even more basic than that. In an attempt to obtain freebies, people have been known to order goods and tell their credit card company that they never placed the order, or never received it. When customers dispute orders, credit card companies take back the funds previously credited to the merchants, and the merchant is left to prove the goods were delivered as ordered. The process is called a chargeback.
Many times, people are able to keep the goods they received. If a signature wasn't obtained when the shipping company delivered the order, there is no way to prove the package was delivered.
"What I call 'marginally honest people' are out there committing fraud on the Net," says Allen Jost, VP of the risk-management group for eHNC, a division of HNC Software that provides services and software solutions for online merchants, including fraud detection, wallet services and data-mining.
Combating fraud has always been a cost of doing business, long before e-commerce came along. But another element unique to Internet merchants is the cost of losing valuable business as a result of fraud protection efforts. Antifraud systems use algorithms to detect risk, and the systems will reject an order if it falls within a designated realm.
Small merchants like TheSmokeShop.com can afford to phone each customer whose order is deemed too risky. But retailers that deploy such systems on a large scale are forced to let orders fall by the wayside, meaning they could be losing valuable customers. "Merchants are declining 15 percent to 20 percent of transactions to keep fraud down to 1 percent," eHNC's Jost says. "That's the real concern."
Is there any hope to eliminate fraud in this new barrier-free environment? Even the experts say no.
"There is no silver bullet," Jost says. "You have to recognize you have the problem, and manage your business to address it. Nothing will eliminate fraud altogether."
There are hundreds of technology experts who help online merchants stay ahead of fraud. Credit card firms have increased efforts to help their merchant customers. And merchants are hopeful the situation will improve.
"It's definitely a big concern," says Spencer Waxman, cofounder and president of Flooz.com, an online gift-currency site. "But I think the technology from the credit card issuers is going to catch up. I think we'll see a lot of evolution in this space in the next 12 months."
