Credit Card Fraud

The competition between online merchants is quite high.  There are billions of online companies seeking to sell a wide variety of products and services.  With so many companies and services available, the consumer is left to answer the question of who has the best offer.  A lot of times the answer comes down to one or two factors. 

Method of payment can be a deciding factor when a consumer is making a purchase online.  Most merchants offer a variety of payment methods to the customer.  The most common of these methods offered are credit card and checking account.  Both of these methods have been used for years and are becoming increasingly dangerous.  The credit card and checking account methods of payment are both linked to the consumer’s personal credit information.  This information is highly susceptible to theft.  Customers today are wary of this fact. With each purchase made online using a credit card or checking account, the chances for identity theft increase. 

Here are some staggering stats on credit card fraud from creditcards.com:

• The number of U.S. identity fraud victims rose 12 percent to 11.1 million adults last year, the highest level since the survey began in 2003. (Source: Javelin Strategy & Research, “Identity Fraud Survey Report,” February 2010)
• The average fraud resolution time dropped 30 percent to 21 hours. (Source: Javelin Strategy & Research, “Identity Fraud Survey Report,” February 2010)
• Nearly half of fraud victims now file police reports, resulting in double the reported arrests, triple the prosecutions and double the percentage of convictions in 2009. (Source: Javelin Strategy & Research, “Identity Fraud Survey Report,” February 2010)
• The number of U.S. identity fraud victims increased 22 percent in 2008 to 9.9 million adults. However, the total annual fraud amount jumped just 7 percent to $48 billion. The report said this is because “consumers and businesses are detecting and resolving fraud more quickly.” (Source: Javelin Strategy & Research, February 2009 study.)
• Women were 26 percent more likely to be victims of identity fraud than men in 2008. (Source: Javelin Strategy & Research, February 2009 study.)
• 71 percent of fraud incidents “began occurring in less than one week from when the data was first stolen, up from 33 percent in 2005.” (Source: Javelin Strategy & Research, February 2009 study.)
• “Lost or stolen wallets, checkbooks and credit and debit cards” made up 43 percent of all ID theft incidents in which the “method of access” was known. (Source: Javelin Strategy & Research, February 2009 study.)
• Credit and debit card fraud is the No. 1 fear of Americans in the midst of the global financial crisis. Concern about fraud supersedes that of terrorism, computer and health viruses and personal safety. (Source: Unisys Security Index: United States, March 2009)
• Arizona leads the nation in identity theft complaints per 100,000 people. In 2008, the state had 149 complaints about ID theft per 100,000 people. California (139.1), Florida (133.3), Texas (130.3) and Nevada (126.0) rounded out the top five. (Source: Federal Trade Commission, February 2009 survey)
• South Dakota has the fewest identity theft complaints per 100,000 people in the nation. In 2008, the state had 33.8 complaints about ID theft per 100,000 people. North Dakota (35.7), Iowa (44.9), Montana (46.5) and Wyoming (46.9) rounded out the bottom five. (Source: Federal Trade Commission, February 2009 survey)
• Brownsville-Harlingen, Texas, is the metropolitan area with the largest number of ID theft complaints per 100,000 people. In 2008, the area had 366.8 complaints per 100,000 people. Napa, Calif., was second with 351.3. (Source: Federal Trade Commission, February 2009 survey).

Some merchants have taken this information into consideration and are accepting forms of payment, other than the traditional credit card.  Consumers are now able to apply some purchases to their monthly telephone bill.  This method of payment is becoming very popular.  Not only does this method of alternative payment appeal to the person wishing to protect their identity, those without credit cards are now able to participate in online purchasing.  Of those that have never made an online purchase, over thirty percent has been due to the lack of owning a credit card. Merchants wishing to reach out to these customers now accept alternate billing. 

Accepting this alternative method of payment can greatly increase the revenue for a company.  The process is easy to implement.  Consumers feel safe knowing their personal information is secure and are more willing to spend money on what they want when they feel safe.  Merchants are beginning to understand this and adapt in order to please the customer. If the customer is happy, they will return for repeat business and maybe even suggest products or services to others.  The alternative billing through the telephone bill is a win-win situation for both the merchant and consumer.

When making a purchase online, there are a variety of methods that can be used to complete a payment transaction.  Two of the most common used are credit and third party billing to a telephone bill.  These two methods are similar in some aspects but vary in several.

Applying a purchase to a phone bill works similarly to credit card transactions in that the customer chooses the bill to phone payment option then is prompted to enter their telephone data much in the same way credit card information is entered to be verified and accepted.  There is information obtained that is unique to the bill subscriber that is used strictly for verification purposes.  The information is then communicated from the merchant over a secure gateway to a processor, or third party biller (also known as third party clearinghouse). Next, the data is authenticated by the processor or clearinghouse.  Once the identifier information is authenticated, the clearinghouse sends confirmation back to the merchant.  The merchant then sends the EMI record for billing to the clearinghouse for processing.  The clearinghouse in turn sends the EMI record to the Local Exchange Carrier (LEC) for inclusion in the next billing cycle. The LEC is responsible to remit payments received less processing fees to the clearinghouse, which then is remitted by the clearinghouse to the merchant, much like credit card payment flow as follows (courtesy of Bank of America).

In the credit card world, the flow of information and money between the merchant, the acquirer, card association and issuer is known as the interchange, and it consists of a few steps:

Authorization

The cardholder pays for the purchase and the merchant submits the transaction to the acquirer. The acquirer verifies with the issuer—almost instantly—that the card number and transaction amount are both valid, and then processes the transaction for the cardholder.

Batching

After the transaction is authorized it is then stored in a batch, which the merchant sends to the acquirer later to receive payment (usually at the end of the day).

Clearing and settlement

The acquirer sends the transactions in the batch through the card association, which debits the issuers for payment and credits the acquirer. In effect, the issuers pay the acquirer for the transactions.

Funding

Once the acquirer has been paid, the merchant receives payment. The amount the merchant receives is equal to the transaction amount minus the discount rate, which is the fee the merchant pays the acquirer for processing the transaction.

Bill to Phone Method

The bill to phone method is different from credit card purchases in that the consumer is not offered a credit line, but has the ability to charge services to their home phone bill by the phone company.  Payment in full is due during the next billing cycle. In general, with this form of payment merchants are not paid until the consumer pays the bill.  However, there are instances and companies that forward monies to the merchant upon receipt of the bill in expectance of compliance by the subscriber, which is direct billing.

There are benefits to applying a purchase price to an existing telecommunications account.  Being that the account is already established, minimal identifier information is necessary to complete the transaction.  This means that your credit information is still safe and secure and not across the internet for the public to see.  Let’s face it; the internet is not the most secure place to display personal information.  This method of alternative payment is not only more secure, it is easy to do.  The ease of use coupled with the security is what sets this method apart from credit card transactions.

Online alternative payment solutions are rapidly becoming the trend among consumers.  The use of non-traditional payment methods have more than doubled among consumers in past years.  Customers are appreciative that their credit information is not needed to complete their online transactions.  There is almost no chance of identity theft when using alternative payment methods like billing to a telephone account.

There are many consumers that do not own a credit card or have a bank account.  Previously, these customers were unable to participate in e-commerce.  Having a credit card or bank account to bill was a pre-requisite to online shopping. This is no longer a fact.  Although many consumers lack ownership of a credit card or bank account, most have a home telephone bill.  The newest form of payment available to these consumers is the ability to apply their purchase to their telephone bill.  By letting customers charge their online purchases to their telephone bill, merchants increase their opportunity for sales.  Over ninety percent of the country is now able to take advantage of this alternative method of payment for services or products. With availability like that, profits are bound to increase by staggering numbers. 

Consumers appreciate the convenience of not having to enter in personal information on the internet. Credit is a large part of our economy and protecting it is a priority.  Identity theft is on the rise through the internet.  Keeping credit information safe is probably the best way to prevent it from happening to you.

The wide variety of services offered using this form of payment is another sell point.  Several forms of digital content including music, video games, podcast downloads, online news subscriptions, and online dating subscriptions can be purchased using alternative billing.  Advanced home phone payment solutions such as fraud management controls and identity verification assure the merchant of payment for services, reducing the risk taken by the merchant.

Although the bill to telephone method of alternative payment is not perfect, it does provide some peace of mind to the consumer apprehensive about purchasing online because of the information required. Measures are being taken by merchants and third party billing companies to protect against fraudulent purchases.  Unfortunately, with any form of payment there is some risk of fraud.