During the last few years there has been an increase in
online fraud of global scope and geometrically increasing proportions. There are
now actual companies that specialize in spam and other illegal marketing
techniques, like Phishing and Hacking, that take every opportunity to make a few
pennies. Even though their net income per person is miniscule, it becomes
significant when multiplied by hundreds of thousands or even millions. Added to
this threat are the man amateur fraud artists around the world who troll the
Internet for credit card and financial information to use for fraudulent
purposes. Finally, identity thieves are reaping high rewards at the expense of
both the target and the online retailer.
Credit card fraud on the Internet has reached gigantic
proportions, and the merchants providing goods and services over the net are
suffering tremendous losses through chargebacks from the financial institutions
who serve the targeted credit card holders. Merchants who offer a product or
service online have to take the risk of losing the cost of the product sold
online, plus the added cost of chargeback fees, and they even face the
possibility of having their merchant account terminated by the financial
institutions serving them. While this cost can ultimately be passed on to the
consumer, the development of this environment hurts business as a whole, and
particularly hurts the small business owner. The Cybersource® Online Fraud
Report showed Internet fraud had cost merchants $2.6 billion, or 1.8% of total
online revenues, in 2004.
The purpose of this document is to introduce 10 preventative
measures that merchants can take in order to minimize credit card fraud.
1. Geolocation by IP address
In the world of e-commerce, knowing the online buyers
geographic information can help to prevent fraud. Geolocation technology
provides the absolute geographic location by IP address of the computer from
which the order is made in real-time e-commerce transactions, which can identify
locations where the probability of fraud is the highest.
Geolocation by IP address can identify the user's exact
location or calculate the distance between billing address of online buyers and
actual location of persons entering the orders. As a result, it allows the
merchants to apply additional authentication measures or identification for
those transactions which show a great difference of distance. As a result,
Geolocation technology delivers data that helps merchants determine which
transactions to review and which to allow. This creates a beneficial balance
between the risk of fraud losses and that of blocking legitimate customers.
Legitimate customers will actually welcome legitimate authentication measures,
which will protect them from credit card fraud also and keep the costs of doing
business on the Internet down, especially if the customer is properly informed
and advised by the merchant of these protection measures.
2. Comparison of the IP address country with the billing address
An IP address is a unique network identifier issued by an
Internet Service Provider to a user’s computer every time they are logged on
to the Internet. Make sure the IP address country and the billing address
country are the same. If
the customers billing and shipping addresses are in the US, but the person
placing the order is logged in from an IP in Russia, this will require closer
scrutiny, and will often trigger anti-fraud precautions. Although this situation
could be legitimate, but it's probably worth a phone call to the customer's US
phone number or other measures to confirm the order and the identity of the
credit card user.
3. Check whether the country is a “high risk” country
Always require closer inspection for orders that being
shipped to an international address. Pay more attention if the card or the
shipping address is in an area prone to credit card fraud. According to a
ClearCommerce® survey, the top 12 international sources for online fraud are
Ukraine, Indonesia, Yugoslavia, Lithuania, Egypt, Romania, Bulgaria, Turkey,
Russia, Pakistan, Malaysia, and Israel. The same survey also showed that the 12
countries with the lowest fraud rates are Austria, New Zealand, Taiwan, Norway,
Spain, Japan, Switzerland, South Africa, Hong Kong, the UK, France, and
Australia. While the fact that an order
originates or is being delivered to one of the high risk countries is not, in
itself, an indication of fraud, nor is the indication that the order originates
in a low risk country any guarantee of its legitimacy, the trends and statistics
are there, and merchants must use information about the origin and delivery
addresses as a guide to how much authentication they should require from
4. Check whether a free or anonymous e-mail address was used
Be aware that online buyers using free anonymous e-mail
providers such as hotmail.com or yahoo.com are virtually untraceable. There is a
much higher incidence of fraud coming from free email services than from paid
service providers. Virtually everyone who has a free, web-based email address or
forwarding address also has a traceable ISP address. While many legitimate
customers use free email addresses, because they are convenient and economical.
It is also true that most fraudsters use free email addresses in order to remain
anonymous. However, most businesses purchasing a business product have their own
domain names and even if they do not, they would not use a free email address.
For these reasons, you need to have some way to get additional information when
a free email address is used, such as the ability to locate the customer
geographically when they place their order, so you will know which orders need
further checking for authenticity. Keep an eye out for newly registered domain
names. This is because fraudsters can register a new domain easily using the
stolen credit card to pose as a new business entity.
5. Check whether an anonymous proxy server was used to place the
Anonymous proxy servers allow Internet users to hide their
actual IP address. The main purpose using a proxy server is to remain anonymous
or to avoid being detected. While well known businesses use this to protect
internal networks, fraudsters hide themselves behind anonymous proxy servers. It
is not easy to detect anonymous proxy servers because they appear and disappear
from time to time.
6. Check whether the mailing address is a mailbox or ship-forward
Fraudsters prefer to stay untraceable but still need to
collect physical merchandise. One way is to use a public P.O.Box, a private
mailbox, or a drop shipment forwarding address as a temporary point of
receiving. Never send merchandise to a public rented mailbox, a P.O. Box (except
for those you identify as legitimate major companies by phoning their listed
number), or shipping forwarder, because the actual location and identity of the
receiver is undetectable.
7. Check whether the phone number is valid and located within the correct
Often, merchant will discover orders with invalid zip codes
or a mismatch between the zip code and area code will produce fraud rates that
are significantly higher than usual. They may wish to apply more rigorous fraud
prevention standards by verifying the validity of zip code and the area code. In
addition, if the phone is identified as a V.O.I.P phone, offered by many
services these days, a delay in shipment until the payment clears may be in
order, especially for non-times sensitive items.
8. Compare the credit card issuing bank’s country with the billing address
Another key point to bear in mind is to check the issuing
country and the billing address. Make sure the issuing country and billing
address country are the same. This is especially important, because minor banks
may not have rigorous identification procedures.
9. Call the credit card issuing bank to verify the validity of credit
If online merchants have any suspicions about an order and
need to confirm the details of the order, they can call the issuing bank and ask
to confirm the general account details. This is to make sure that the card is
not stolen. The issuing bank phone number is based on the first 6 digits of
credit card number known as the Bank Identification Number (BIN).
10. Request more identification if in doubt
While consumers value their privacy and require quick web
site ordering facilities, it is important to gather sufficient customer identity
details during the ordering process. The customers’ name, credit card number and
expiry date is not enough. Merchants should call them for verification through
phone or request a photo ID to be faxed if they have any doubts.
Every merchant should aware of online credit card fraud,
although it is something that can never be completely eliminated, but rather
something that must be managed. One of the most important factors in
controlling fraud is understanding the customer and implementing security
measures that can adapt to the level of risk in each transaction. This white paper focuses on preventative methods and
procedures that merchants can perform in order to limit credit card