Interesting article from today's NYTimes
New Hardware Could Help Web Merchants Cut Fraud
By BOB TEDESCHI
"Credit card companies love the Internet, since they pocket a share of most e-commerce transactions. But like everything in the world of revolving credit, that love has limits. Stolen cards used to make purchases online, in particular, cost credit card issuers millions each year -- pushing the price of doing business on the Web higher for banks, merchants and, ultimately, users.
UTM Systems has announced deals with four major banks affiliated with Visa and Mastercard International to distribute UTM's PC credit-card reading device.
So even as the major credit card companies and the banks that issue those cards explore ways to build Internet market share, they are also looking for creative ways to limit fraud.
The recent launch of the American Express blue card, which comes with an embedded computer chip, is an example of both efforts. Since the card's chip can access a user's personal information, it will eliminate the hassle of typing in that data in every Web purchase -- and, American Express hopes, encourage people to use its card. At the same time, the chip limits the fraud by guaranteeing the shopper's identity and offering greater protection to the buyer's information during the transaction.
The key to these features is a piece of computer hardware that, until now, has been foreign to the desktop: a credit card reading device. Starting in November, blue card owners will be able to obtain such a device, which they will be able to plug into their PC's, enabling them to swipe the card at home much like a sales clerk would at a retail store.
Other credit card issuers are exploring similar technologies. One company that makes a card-reading device for personal computers, UTM Systems, recently announced that four major U.S. banks affiliated with both Visa and Mastercard International will begin distributing its system free to consumers before the end of the year. UTM's founder and chief executive, Robert Lee, declined to name the banks, but said they served "well over 10 million customers."
The device, which costs the card issuers $6 a unit, is simple. When a user is ready to make an online purchase, the credit or debit card is placed in the UTM card reader, which is inserted into a floppy disk drive. A small window then appears on screen, asks for a personal identification number and sends the encrypted information to the retail site. When the transaction is complete, the window disappears.
David Robertson, president of the Nilson Report, a credit card industry newsletter, predicted that credit card companies would be aggressive in spreading such technologies. "American Express is the first, but you'll see everyone start to do this by the end of the first quarter of next year," he said. "It's inevitable."
From the standpoint of fraud prevention, card issuers have great incentive to promote the devices, he said. Issuers lose roughly 8 cents for every $100 in online sales to fraudulent card use -- "slightly higher than the market at large, but it's growing," Robertson said.
"The industry has been fabulously successful at pushing fraud down in general," he added. "But that just highlights the liability associated with the Internet."
Which is not to say that Visa, American Express and Mastercard are stepping lightly into the electronic frontier. Each has begun major Internet-related advertising efforts, of which Visa's is the most aggressive. According to the Nilson Report, 59 percent of Internet credit card purchases are made with Visa, 28 percent with Mastercard and 12 percent with American Express. Off line, Visa has a 51 percent share, compared with 25 percent for Mastercard and 17 percent for American Express.
In part, the success of PC-based credit card readers hinges on how secure consumers feel about credit card transactions on the Web. While such devices in fact provide users more security than typical Internet transactions, surveys indicate that consumers are less concerned about entering their credit card data online than they used to be. One recent survey by Navidec, a consulting firm, indicated that 21 percent of Internet users worry about credit card security during transactions, about half the number that expressed such concerns in 1997.
However, Paul Hughes, an analyst with the Yankee Group consulting firm, says that new Internet users might warm to these devices, given the trepidation with which many still approach online shopping in general. "That said, the credit card companies are going to have to do some creative marketing to drive these into the hands of consumers," he said.
At least one online merchant is leery of such creativity. "If credit card companies say that only with this device is a transaction secure during transmission, that would be a disservice to e-commerce as a whole," said Peter Baltaxe, senior vice president of 911Gifts.com. "I don't know of a single documented case of a credit card number being taken in transit."
If credit card companies succeed in spreading the gospel of card-reading devices without scaring consumers, it could help the cause of e-commerce merchants, who have gone to great lengths to reduce fraud in recent years. Internet retailers have cut the rate of fraud from as much as 15 percent of online transactions earlier in the 1990s to roughly 2 percent today, but given the difficulty of achieving a profit online, that figure still rankles executives.
More important, however, is the premium Web merchants pay in credit card transaction fees because of the higher risk of fraud associated with online purchases. The biggest Internet-only retailers can negotiate transaction fees of roughly 2 percent, which are competitive with off-line retailers, but most e-commerce sites pay at least 1 percentage point more -- often 3.5 percent. Such purchases -- so-called "card not present" transactions in industry parlance -- are deemed riskier because the retailer cannot physically match the credit card with the buyer.
Card-reading devices would presumably solve that problem, since they insure the identity of card holders by requiring them to enter a personal identification number. "Would we like to have fees reduced, seeing that we're always dealing with the card-not-present issue?" said Elaine Rubin, chairman of Shop.org, an e-commerce trade group. "Clearly we'd love that. Is that going to happen? It's too early to tell."
Both American Express and Visa representatives agreed. "We would have to look at the entire value proposition" before reviewing online merchants' transaction fees, said Michael Biendorff, who heads Visa's recently formed Evisa unit. "Right now it would be premature to speculate."
The E-COMMERCE REPORT is published weekly."
OT) This has nothing to do with Wave, but today's NYTimes also had an article that I thought was interesting about how some outfits like Nerve.com (an erotica website) and others are paying writers in stock options instead of hard-cash... |
