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11.2 Using Payment Cards Online 341

to manage fraud. Over the years, the CyberSource surveys
2. Use a point-of-sale (POS) system operated by a (CyberSource is a subsidiary of Visa) also have monitored
card acquirer. Merchants can redirect cardholders the steps taken by merchants to combat fraud. Today, virtu-
to a POS system run by an acquirer. The POS han- ally every merchant has instituted automated processes
dles the complete payment process and directs the backed by manual review to detect fraudulent transactions.
cardholder back to the merchant’s site once pay- The exact automated procedures vary from one merchant to
ment is complete. In this case, the merchant’s sys- the next. However there are some tools that are used by a
tem deals only with order information. In this majority. The key tools used in combating fraud are:
configuration, it is important to find an acquirer that
handles multiple cards and payment instruments. If
not, the merchant will need to connect with a multi-
tude of acquirers. • Card verification number (CVN). More than
3. Use a POS system operated by a payment ser- 86% of all merchants use the card verification
vice provider. Merchants can rely on payment number (CVN) method, which detects fraud by
service providers (PSPs), which are third-party matching the three-digit verification number
companies that provide services to merchants so printed on the signature strip on the back of the
they can accept all kinds of electronic payments. credit card (or the four-digit number on the front of
The PSPs connect all participants in the electronic the card, such as American Express cards) to the
transactions. See an example at usa.visa.com/con- number stored by the cardholder’s issuing bank.
tent/dam/VCOM/download/merchants/bulletin- However, if a fraudster possesses a stolen card, the
mobile- best-practices.pdf. number is in plain view and verification becomes
difficult. Attempts are made to check the habits of
the card user (e.g., to check unusually large pur-
Option number 1 is simply the base method that is shown chases or purchases made overseas). In such cases,
in Figure 11.2. With option 2 the merchant steps to the side a cardholder may get a telephone call from the card
and lets the acquirer deal with the customer’s payment. In issuer or the credit card company, asking for verifi-
option 3, the merchant simply deals with a third-party pro- cation of identity. In such a case, the verification
cessor that handles not only card payments but other types of may be done by intelligent software agents
payments as well. These third-party companies can also alle- automatically.
viate the need for merchants to establish relations with • Address verification. A vast majority of merchants
acquiring banks. (better than 86%) use the Address Verification
System (AVS), which detects fraud by comparing
the address provided by the buyer at checkout with
Fraudulent Card Transactions the card address on file. Unfortunately, this method
may result in a number of false positives, meaning
Although the processes used for authorizing and settling that the merchant may reject a valid order.
card payments off-line and online are very similar, there is Cardholders may have a new address or simply
one substantial difference between the two. In e-commerce, make mistakes in inputting numeric street addresses
the merchants usually are liable for fraudulent transactions. or zip codes. AVS is available only in the United
In addition to the cost of lost merchandise and shipping States and Canada.
charges, merchants who accept fraudulent or unauthorized • Customer order history. The purchases made with
cards for payments may have to pay penalties to the credit a particular card (and card holder) tend to follow
card companies. However, these are not the only costs. regular patterns with respect to place, amounts,
There also are the costs associated with combating fraud- types, and velocity. Order data from the cards used
ulent transactions. These include the costs of tools and sys- can be mathematically and statistically mined to
tems to review orders, the costs of manually reviewing discern these patterns. Current card purchases can
orders, and the revenue that is lost from erroneously reject- be matched against these patterns to detect anoma-
ing valid orders. According to CyberSource’s sixteenth lies in real time in order to flag them as potential
annual survey (CyberSource 2016) of online fraud manage- fraud. Close to 78% of merchants employ this
ment, fraudulent online card transactions still result in sub- process.
stantial losses although the rate of e-commerce revenue loss • Negative lists. Close to 70% of the merchants use
has remained steady (at .9%) for the past 5 years. The stabil- negative lists. A negative list is a database of card
ity is a function of the measures that merchants have adopted