Ever since opening its virtual doors in 1998, Goldspeed.com (www.goldspeed.com), Lynbrook, N.Y., currently the largest Internet discount jeweler in the U.S., has been vigilant about combating payment card fraud, says company CEO Neil Kugelman.    
     Kugelman’s experiences provide good lessons about fighting fraud for ISOs and their merchants, particularly those who do at least some of their business over the Internet or over the phone.
    “The total number of fraudulent transactions over the Internet is billions of dollars a year,” Kugelman says. “One of the reasons that it is that high is who is held responsible. If someone’s credit card statement has $10,000 in fraudulent transactions, he’ll contact the bank (issuer) and he won’t be responsible for the charges. The bank doesn’t own that chargeback, they’ll pass it along to the merchant. If the bank would take the responsibility for the chargebacks, the amount [of fraudulent online transactions] would be miniscule compared to what it is today.”
    Despite fraud protections from merchants themselves, fraud issuers, third-party providers and the government, payment fraud shows no signs of slowing any time in the near future. But digilence in preventing the crime can pay off for individual merchants.
    At one time about half of the orders coming into the Internet jeweler were fraudulent, according to Kugelman. That doesn’t mean that all of those orders were shipped, but the more fraudulent orders that come in, the more likely one is to be filled, costing the merchant money.
    A merchant with high-dollar sales, like jewelry, has to be more vigilant than one with low-dollar sales, like a book seller, Kugelman adds. Due to the higher potential payoffs for thieves, the high-dollar retailers are more likely targets.
    Internet fraud is a bigger problem now than ever, Kugleman says, because once thieves learn they can get away with it, they increase their numbers of fraudulent orders. Word also spreads to others looking to make a quick buck.
    However, attempts against Kugelman’s company have dropped from about 50% of orders to about 20%, which Kugelman attributes in large part to continued due diligence and the addition of OrderMotion order management system, which ties directly to the jewelers’ self-developed fraud scoring and monitoring software.
    The self-developed software looks for patterns that indicate potential fraud – like someone ordering six engagement rings, all with a large size.
    Kugelman wouldn’t discuss the exact parameters the scoring system software monitors except to say that the parameters are changed daily and sometimes even more than once a day if there’s any indication (news reports, industry discussion, unusual ordering activity) that fraud attempts are on the rise for particular types of orders. Parameters may also be tightened during certain times of the year (e.g., Christmas shopping season).
    If an order exceeds a certain score, the company will ask the customer for additional information to help confirm the identity and the order before shipping.
    With the in-house software and the order management system, Kugelman also has a way to fight against chargebacks. In 15 minutes before his interview with Transaction World, Kugleman received a total of nearly $8,000 in chargebacks from three separate orders from a single customer. However, Kugelman was confident the chargebacks would be reversed because the two technologies contained a full record of the initial order, the precautions taken to ensure the order was what the customer wanted and the credit card verification.
    The technologies have helped Kugleman keep a lid on chargeback and interchange rates, he says. While Goldspeed.com still gets hit with semi-annual interchange increases, the company hasn’t been hit with the higher charges that many Internet retailers with higher chargebacks must pay, according to Kugelman.
    “The number of chargebacks have dropped dramatically,” Kugelman says. “We’ve always been very good at this (limiting chargebacks) because we couldn’t afford not to be.”
    The order management software helps the company handle more orders more quickly while also verifying credit card information using address verification. Since installing the system nearly three years ago, the company has cut chargebacks to “nearly nothing,” according to Kugelman.
    Kugelman has the following advice for ISOs discussing fraud protection with merchants:

• Fighting fraud requires constant activity. A merchant can’t simply install some fraud prevention measures and forget about them. They need to be updated and revised as situations dictate. Results also need to be monitored to ensure that fraud-fighting systems are working as expected.
• Be vigilant. When taking an order, particularly over the Internet or over the phone, look carefully at the customer making the order. Does the order make sense (as in the above engagement ring example).
• Weigh the cost of fighting fraud against potential profit. A merchant with a very low percentage margin needs to be very vigilant. However, a merchant with very high mark-ups can afford more cases of fraud in order to make more sales.
• Remember, the merchant always has the right to refuse a sale if fraud is suspected. Be ready to turn down a sale if not satisfied that it’s a “good” order.