Smartcards: Making Web Shopping Safer

Most people today know that fraud on the Internet is much higher than fraud off the Net. Not surprisingly, credit card transactions on the Net are 800 to 900% more likely to be fraudulent on the Net than off. But when you talk about fraud to a the average surfer, they tend to think in terms of being defrauded by a merchant. A few go a bit further and think about having their credit card information hacked and used without their permission. It may only be sellers who realize that the biggest fraud may actually be perpetrated by normally honest folks who wouldn't think of shoplifting. But thanks to outdated credit card laws and even more outdated interpretations of those laws, the protection given to most cardholders far outweighs common sense.

The charge back rights under the law gave shoppers the right to dispute charges where 1) the charge was unauthorized or 2) the merchandise received was not as described or 3) the merchandise was not sent within specific time frames. There was a limited time period during which these complaints could be brought, minimum amounts which be charged back and certain proof that had to be presented to validated the claim. Credit card issuers have interpreted these laws broadly in the buyes' favor and some buyers have learned that they can charge back anything for any reason up to a year later without presenting any proof. It is the merchant who takes the hit.

A son uses his father's card or a wife uses her husband's card to order merchandise. The items are delivered to the cardholder at his billing address. The cardholder then complains that he did not authorize the charge. The issuer (foolishly) refunds the payment while allowing the cardholder to keep the merchandise. It has reached the point that folks are no longer robbing banks because they are busy robbing merchants from the convenience of their home.

It took years of merchant complaints, lawsuits and bankruptcies for the issuers to finally take notice. But even as the laws are slowly being changed to be more equitable to merchants, new technology is also allowing Internet transactions to be made more safely for both the buyer and the merchant.

In about a year it will become mandatory for Internet merchants to become part of a security system initiated by Visa. Under this system, buyer's will choose a password when obtaining their credit cards. When making an Internet purchase, they will be directed to a secure site operated by Visa or the issuing bank where they must enter that password. Only when the valid password has been received will the transaction be authorized. Since this password is never stored on a vendor's site (the vendor never even sees it), hackers and thieves will be deterred from making credit card purchases over the Net.

Another innovation is the Smartcard. This card will contain a chip that uniquely identifies the card. PC's will be equipped with readers. When an Internet transaction is made, the cardholder will have to run his card through the reader. Since hackers will not have the card physically in their possession, this will prevent fraud. So consumers will be protected against having their credit cards misused.

What about merchants? It will be difficult for a husband to claim that his wife used his card without permission when the purchaser knew the cardholder's password. It will be even more difficult to do so when the card was physically present during the transaction. According to what I have been told, merchants will be protected against such claims if they follow the guidelines.

Here is a ZDNet article about Smartcards.