Internet fraud threatening on-line merchants, not banks

Most internet fraud involves the use of fraudulently obtained card details to make a purchase, known as cardholder-not-present fraud.

When cardholder-not-present fraud takes place, it is the retailer rather than the issuing bank that is liable. In practice this means that retailers face a charge – known a charge-back – if card details have been fraudulently obtained, even if the transaction has been correctly authorised.

Internet fraud now costs the British economy £28m a year, compared with £3.8m in 2000 and is acting as a disincentive to trading on-line, according to the FSB.

In a letter to E-Commerce Minister, Stephen Timms, the FSB explains that credit card fraud over the internet and telephone is a major concern to small businesses because the retailer rather than the issuing bank carries the liability.

Among the businesses that have been affected is David Barrett, director of Cybercomp which sells computer parts, who shut his web site after getting stung for £2,500 charge-back. He thought he was protected after getting authorisation for the transactions from the bank that issued the card.

FSB Policy Chairman John Walker explains:

"Businesses are confused over what authorisation means. When a transaction takes place over the internet, credit card authorisation is not a payment guarantee, it only indicates that the card has not been reported lost or stolen and there are sufficient funds available in the cardholder account."

The FSB is Britain's biggest business organisation, representing 180,000 members. It argues that there should be a liability shift so that the issuing bank is liable in the event of cardholder-not-present fraud in the same way as the card issuer is liable in the event of cardholder-present fraud.

The FSB also believes that it is essential that when businesses open a merchant account, they are informed that they are liable in the event of cardholder-not-present fraud. FSB members also report that when such fraud occurs they are unaware of the correct procedure for it to be reported; this needs to be addressed.

The FSB fears that cardholder-not-present fraud will grow as the banks focus on tackling cardholder-present fraud through the new "chip and PIN" credit card initiative. John Walker says: "There is a danger that as chip and PIN takes off, fraudsters will just use the internet instead."

Further information on the new chip and PIN credit cards is available at: www.chipandpin.co.uk