Americans are applying for credit cards on the Internet and buying online in greater numbers. Still, many hesitate. What's being dome to reduce fraud - and the fear of it.
Credit card issuers pinned their fortunes a few years ago on the Internet economy's muscle. Immediate online credit approvals, issuers knew, would entice U.S. consumers and meet their need for instant gratification.
Yet many Internet users still sit on the sidelines, willing to browse but reluctant to purchase online for fear of having their account numbers - or worse, their identities - stolen. Indeed, something seems amiss about the way many issuers use the Internet. Consumers looking for balances or trying to pay bills online need a password to log on to a card company's website. To spend money on other sites, however, consumers historically only needed a card number - the same one that's on the stray receipt left on a restaurant table, dropped from a pocket, or tossed into the garbage bin out back. That's about to change.
Both Visa U.S.A. and MasterCard are rolling out identity check offerings. Late last year, Visa U.S.A. invited cardholders to link their cards to passwords that would be required when shopping at participating online stores. The new service, Verified by Visa, is designed to raise the level of security and allay fears of fraud that haunt many merchants and consumers. Verified by Visa is an answer to the question of how to authenticate online buyers to online sellers, without sacrificing adoption rates and business potential, says James McCarthy, senior vice president at Visa's eVisa business unit. "We struck a chord with people. There is a latent demand for control of security..about how to manage their digital IDs," McCarthy says.
The process is relatively simple. Consumers need no special software. They just register for a password with the bank that issues their card. Merchants are linked back to the card issuer that verifies the cardholder's identity based on that password. For merchants, there is no payment gateway or specialized program to install. Consumers presumably lose the fear of unauthorized use of their credit card.
"The issuer is basically guaranteed the transaction. The merchants now know that they're protected," says McCarthy, who continues working the marketing angle while lining up new merchants and issuers. A television advertisement about Verified by Visa ran before the kickoff to the Super Bowl, and the website saw immediate 11 click throughs" - a good indication of consumer interest.
Identity Check
MasterCard's planned identity check approach is reportedly more detailed. Its system should launch later this year and, like Visa's, at first will be optional for cardholders, online stores, and the banks that issue the cards.
Two dozen merchants - including CompUSA, Buy.com, Dell, Orbitz, Target, and Wal-Mart - are signed up for Verified by Visa. Banks from First USA to Bank of America also are on board, as are credit union groups.
There is finally a feeling among issuers that it's time to get at the root of the identity verification problem before it grows out of control. "When we look at research and talk to our customers, we know there is a group that would like us to provide an added level of security," says Hugh Bleemer, executive vice president for e-business at First USA, the largest Visa card issuer.
Overall, fraud arguably is not a major problem for issuers. Just 7 cents for every $100 in card purchases is lost to fraud, half the rate of 10 years ago, Visa says.
And under credit card rules, online stores must cover the costs of any charge the consumer says was unauthorized. In a store, where the customer signs a charge slip, the bank issuing the card is liable for fraud.
Next year, Visa hopes to change the rules governing who pays for unauthorized online charges so merchants accepting Verified by Visa will not be liable. That might not be enough to convince popular online shopping sites such as Amazon to join the program.
Amazon touts fast checkouts, and may be reluctant to add verification systems - believing there would be too many drawbacks to turning one-click ordering into three- or four-click checkouts, despite the expected fraud savings, Amazon officials say.
Still, on the issuer side, Visa hopes to have close to 90% of all Visa cards eligible by the end of the year. Currently the number is closer to 50%.
A larger problem for issuers regarding the Internet could be the use of the Web for issuing online credit. A labyrinth of international fraud rings wrecked havoc on revenue for many issuers offering fast credit approvals online. Insiders know there are handwriting characteristics unique to non-U.S. residents, traits that historically set off fraud alarms.
But online those differences are lost. "The Internet is dangerous if a company's plan to use it is not strategically put together," says Stan Myers, with Bayshore Consulting, a Foster City, Calif-based firm that has studied the Internet's impact on credit card issuers. "The chief problem is, on the Internet, issuers lose that variable of weeding out potential fraudulent applicants."
Steady Approach
Myers warns issuers against a no-holdsbarred approach. "They need to have a system of checks and balances. Those issuers advertising real-time decisions, usually within 60 to 90 seconds, should ask themselves, Who is out there asking for credit,'" says Myers, who adds that only an estimated 10% to 12% of online applicants have FICO scores considered desirable to an issuer with stringent standards. "The rest are going to be potential fraudsters or people looking for credit that an issuer probably doesn't want to have on their books," he says.
Nearly three of four Americans are now online, and the average user is logged on about 10 hours a week, says a recent UCLA Center for Communication Policy study, which polled 2,000 wired and unwired Americans. Early on, it was assumed users were mainly younger - likely wealthier - a sure bet to want more credit and better equipped to make regular payments.
"With the mass solicitations out there in the mail, you're looking at phenomenal volumes and countless opportunities for someone to get credit," Myers says. "Why would somebody with good credit have to go to a website to apply for credit% That should tell the issuers that they're dealing with a population that is probably not getting these offers in the mail and therefore not good prospects."
In the past two years, issuers offering real-time account numbers on the Internet have scaled back credit lines - some to a maximum of $250, some refusing a credit line until the card actually arrives and is activated.
The measures being taken by Visa and MasterCard show that while Americans' enthusiasm for the Internet did not dim as "dot-com" went from buzzword to buzzkill, consumers are demanding more online security. Having learned some hard lessons, card issuers and merchants want it too.
Other changes are coming. Physical cards, for example, once thought to be a good way to verify consumers identities, are being replaced by throwaway account numbers and passwords - both gaining favor from consumers because they don't require hooking new security devices to their PCs.
Converting Numbers
The setup changes actual card numbers into numbers good for one purchase, keeping consumers' card numbers off merchant Web servers. The cardholders get fake expiration dates to pass to the merchants, and the issuer then matches the phony data with real account information.
MBNA Corp., Discover (Card) Financial Services, and American Express - under the name Private Payments - all have throwaway number products.
"While professional criminals or white-collar thieves commit a majority of credit card crimes, a large number of instances are also attributed to `normal people who perceive an opportunity and make use of it," says Sriram S. Natarajan, collections manager with the National Bank of Kuwait's Credit Cards Center. The person misusing a credit card can be a colleague, friend, secretary, neighbor, or an employee of the store where you shop. The Internet makes it easy for anonymous individuals to access credit cards data belonging to individuals across the world."
Consumer doubts about buying online baffle researchers who note consumers seem less concerned with security when spending money in restaurants and malls, the UCLA study says. The study found the percentage of Americans with Internet access rose to 72.3% from 66.9% a year ago, with users spending an average of 9.8 hours a week online, up from 9.4 hours in 2000. With these numbers expected to mount, both issuers and merchants will continue to vie for consumer spending on the Internet.
How they fare is likely to come down to how well they do in eliminating fraud - and the fear of it.
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