Merchants at the Wrong End of Payment Fraud

The next step in the evolution
was the use of gold and silver, which
became the most commonly used commodity
money, and are still used today by our
government and banks to run our financial
systems. The central banks have replaced
the gold and silver with banknotes (cash and
cheques), which are backed by deposits of
gold and silver.

A payment falls under what is called a legal
tender and the current banknotes are legal
tender. With the introduction of computer
systems, the movement of funds was done
electronically. Credit cards were introduced
in the 1970s, and they evolved into e-payments.

E-payment begins and ends with
banks, which sit at the very front, middle,
and end of any payment, maintaining buyers'
and sellers' accounts and creating proprietary
networks for facilitating access points,
such as ATM, IVR (phone banking), branch
banking, POS, and virtual banking.
Security has always been an issue when it
comes to payment methods.

Cash and banknotes are the least secure: it is up to the
individual owner to protect them. Banks
were created to protect large amounts of
funds, using a sophisticated safe and alarm
system. But that never stopped criminals
from trying to steal. With e-payment new
security measures were required to protect
a cardholder when using a credit card to
make a purchases.

The security check was originally done face to face, making the merchant responsible for verifying the customer.
As processes became more automated,
payment networks were developed which
allowed merchants to swipe a customer's
card for a purchase.

These networks were
created with some early warning systems
incorporated, such as blacklists. If a card
was on the blacklist, the merchant was
instructed through the POS to obtain the
card from the customers and destroy it.
Internet credit cards have become the de
facto payment standard for consumer
transactions, because credit card transactions
can still be processed without customer
and merchant authentication.

Banks are able to leverage the existing infrastructure
for credit cards, and are willing to use it
to process more and more transactions,
and therefore to derive more revenue from
their customers. Although credit card risks
are changing, customers understand the
credit card product, and banks and customers
are protected ahead of merchants.

To help Internet merchant to protect themselves
against fraud, new solutions have
been introduced, such as Verified by Visa
and MasterCard SPA, which authenticate
parties in the transaction. Verified by Visa
and MasterCard SPA are being marketed to
online merchants by Internet payment gateways
and acquirers.

There will probably never be an "ultimate
weapon" against fraud: this is a war with no
end. With all the software and hardware
solutions that been introduced, we are only
a few steps ahead of the bad guys, because
systems are designed by humans and there
is always someone who can figure out how it
works and how to take advantage of it.

In payment networks, the merchant has
always been less protected than banks and
customers when a fraud takes place. The
merchant will pay a chargeback fee, on top
of the interchange fee, and will lose the merchandise
if the percentage of chargeback is
more than 2%-4% of the total transaction;
the merchant is warned and may lose his
right to process a specific card schema. To
protect against fraud, the merchant
acquirers build security services, which they
sell to the merchants, and the merchants
have to pay an additional fee per transaction.

But there is hope for the merchants with a
new development that promises to protect
banks, merchants, and consumers against
fraud, and give merchants some peace of
mind. Person-to-business (P2B) is a direct
debit service that utilizes a bank's Internet
banking system to allow a customer to
make a purchase at an online merchant.
With P2B direct debit services, funds do not
leave the banking system; instead, they are
settled through the bank's traditional
clearing systems.

How It Works

When a consumer makes a purchase at an
online merchant's website, the consumer is
give an option to pay with P2B at checkout.
By selecting P2B the customer is given the
option of selecting the bank of the account
to be used for the purchase. The customer
logs onto the Internet and is presented with
a receipt of the purchase: when he or she
accepts the purchase, the transaction is
completed.

In the background, the banking system
debits the customer's accounts and moves
the money to a suspense account. The
merchant receives a confirmation of the
purchase and the payment via e-mail. The
merchant requires that the customer have
an Internet banking account in order to be
able to accept the payment. To receive the
payment, the merchant employee responsible
for payments clicks the link in the email,
and is taken to the merchant Internet bank
login page.

The employee logs in, and is presented with
the payment request. The funds are
accepted, and they move from the
customer's suspense account to the
merchant's suspense account. The
merchant has immediate access to the
funds, and at the end of the day the funds
are cleared through the traditional banking
system.

For brick-and-mortar merchants, the same
system can be used with minimal upgrades
to their systems By utilizing mobile devices
fitted with bluetooth or rfid, purchases can
be made at any physical location which
accepts this payment method.

For the P2B payment service to be widely
accepted, banks, merchants, and mobile
operators need to participate in an open
network which offers payment services for
all participants. With the savings from collaborating
on the P2B payment services,
banks, merchants, and mobile operators
can focus on the real value of their business
and not worry about how they going to
manage payments.

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