August 5, 2005

e-Merchants: Surviving Against Scammers Is Not Profitable

Online it is so hard to detect scams. Offline is a little easier as you can at least physically see someone, detect body language and criminals use online more and more to minimize exposure.

However, many merchants suffer so much when scammers hit them. The consumer does not suffer, as we are not liable for unauthorized charges. Banks don't suffer as they don't pay merchants for fraudulent charges. Merchant's suffer as they lose their products and are assess a charge back fee (not to mention shipping charges).

The Wall Street Journal (free access) chronicles the scam of a small jewelry merchant went through and writes When Mr. Kugelman began peddling everything from pearl earrings to thick gold chains over the Internet in 1998, his biggest problem was simple credit-card fraud: the use of stolen account numbers. The bogus orders were often glaringly obvious. Fraudsters ordered big and requested next-day shipping. They left fake phone numbers. They placed odd orders, such as for two engagement rings. Mr. Kugelman designed a computer system to screen incoming orders for such red flags and to bounce suspicious ones into human hands.

Over time, the crooks got better. More of them stole whole identities, using purloined personal information to set up entirely new credit-card accounts. They used untraceable cellular phones, and avoided making oversized orders. When Mr. Kugelman phoned them with questions, they didn't get rattled. He fine-tuned his system, incorporating proprietary scoring guidelines based on such information as what kind of jewelry is ordered and from what part of the country the order originates.

Late last year, he says, the fraudsters upped the ante. All of a sudden, Goldspeed.com was getting orders that showed no obvious signs of fraud on his computer-screening system, but seemed suspicious nonetheless. On Jan. 9, for example, when a customer placed separate orders on the same day, he thought "something looked wrong."

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