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The only area of card fraud that has increased in the last year has been on the internet, via the telephone and mail order. It accounted for a whopping £183.2m in 2005- a worrying prospect for any home-shopping retailer.

This is a rise of 21 per cent on 2004 figures of £150.8m, according to statistics released this March by the Association of Payment and Clearing Services (APACS). This type of fraud, known as card-not-present (CNP), is now regarded as the most prevalent category of fraud in the UK and one where the retailer has to bear the cost.

Such levels of fraud represent a big spanner in the works for the burgeoning world of online retail and a problem that is likely to get bigger for those in the internet space.

"CNP fraud in the UK has grown rapidly over the past five years and, for the last three years, it has been the biggest category of plastic-card crime in the UK," says Mark Bowerman, a spokesperson at APACS. "Online credit-card payments have increased five-fold since 1999, and 13 per cent of all personal credit-card spending now takes place online, making the internet the fastest-growing medium for CNP purchases. The amount of fraud that took place over the internet in 2005 is estimated at £117.1m, 64 per cent of total CNP losses."

CNP fraud is an issue for all home-shopping retailers, large and small, and a topic that will be under debate at this month's European and Catalogue Mail Order Days (ECMOD) show (see box, page 53).

"Fraud is presenting a huge problem for mail-order and internet retailers, as effectively it's an unpunishable crime," says James Middlehurst, managing director of Fraudscreen, a system that aims to identify fraudulent customers based not only on their ability to pay, but on their intention or willingness to pay.

Last year, Sony Computer Entertainment, for example, discovered that there had been about 2,500 instances of attempted fraud over a single given month via its e-commerce website, which sells a range of Sony goods such as Playstation consoles and accessories. At the other end of the scale, John Sollars, founder of online retailer Stinky Inks, which sells printer cartridges, found himself out of pocket by £32,000, only six weeks after launch, after fulfilling fraudulent orders that were paid with CNP.

Technology trials

There's little doubt that the mandatory introduction of Chip and PIN in February this year has made it harder for fraudsters to use cards in cash machines and shops, making the online space more attractive.

"The CNP situation lacks face-to-face contact and the physical aspect of seeing the card," says Dr Akif Khan, solutions architect manager at electronic payment provider CyberSource. "Even if checks are made and these fail, such as checking if the card number is valid, a successful authorisation will be returned in many cases."

Those retailers that use channels such as the internet, mail order and telephone, are having to rely on other technology developments to combat the problem, such as 3D secure, where cardholders use a private passcode to authenticate themselves when shopping online at participating retailers.

According to Bowerman, this initiative has great advantages for the retailer, as it not only reduces fraudulent activity, but gives greater protection against chargebacks - a liability shift that means participating retailers receive protection from CNP fraud. But others say take-up is slow.

"Chip and PIN has made it harder to use credit cards fraudulently 'in the flesh', because you have to know the PIN number to make a payment," says Bruce Townsend, marketing manager at e-commerce software vendor Actinic.

"The security equivalent for online transactions is 3D Secure, marketed as 'Verified by Visa' and 'Mastercard Secure'. Its take-up is way behind Chip and PIN mainly because it requires cardholders to register, but provides no incentive for them to do so. There is some evidence that online fraud is increasing as a result."

Actinic's Townsend adds that some companies have decided not to register because it puts an added barrier in front of customers and they believe it may deter people from making a purchase.

"Eventually, the card issuers will find a way to break this deadlock and the system will become more widely adopted," says Townsend. "But in the short term, individual retailers will have to weigh the merits and demerits of registering and decide accordingly."

A 3D-secure validated transaction will not protect the retailer in circumstances such as when a customer denies receipt of goods.

"There are also no similar initiatives for Switch, Solo, American Express and Diner's Club, so it is not a good idea for the retailer to rely solely on these schemes," says Michael Alculumbre, managing director of payment provider Protx.

Others are also investing in fraud-screening measures to prevent CNP fraud. Home-shopping business Redcats UK, for example, responsible for catalogues such as La Redoute, Empire Stores and Daxon, has noticed an increasing amount of attempted CNP fraud. Last year, it turned to fraud-screening service, The 3rd Man. At regular intervals throughout the day, Redcats UK sends details of transactions to The 3rd Man, which determines the risk level of each transaction and any high-risk ones are referred to a manual review.

Services such as Fraudscreen enable brands to code potential and existing customers, based on information shared on a database, so that brands can recognise not only fraudulent customers, but their most profitable ones.

It works with clients such as Reader's Digest, Book Club Associates and Compton & Woodhouse.

Geo-demographic profiling too can be an effective entry-level tool for highlighting potential fraud. "Postcodes hold a wealth of general information about the people who live there; from income levels to average house prices, age ethnicity and preferences, all of which can be used to flag discrepancies," says Guy Mucklow, managing director of address management software firm Postcode Anywhere.

Future trends

Jane Crossley, consultant at data services provider Jaywing, believes the next few years will see an aggressive migration to using 3D-Secure technology in the online space. Other technology options are also on the horizon.

"3D Secure is happening right here and now, but some way down the line the industry will introduce the Chip Authentication Programme," she says.

This is similar to a consumer Chip and PIN, whereby the consumer slots the card into a handheld reader and enters their PIN. A one-time number is then displayed on the reader and can be verified by the card-issuer's system, and the customer can then enter this number online or on the telephone. Barclays bank has already trialled this system.

While many in the industry agree that no fraud-screening service is perfect, statistics show that the cost of managing fraud has a significant impact on the bottom line. While the cost of existing high-end fraud management tools can be prohibitive in some cases, with CNP fraud levels expected to rise, it's an area that no business can afford to ignore.

POWER POINTS
- Chip and PIN has made it harder for fraudsters to use cards in store
- Card-not-present (CNP) is the most prevalent category of UK fraud
- Online retailers should invest in fraud-screening technologies

CASE STUDY: GAME
Brief: To develop a secure online sales channel that would match the
trusted offline brand and deter fraudsters
Target audience: Existing and new customers
Supplier: CyberSource

Specialist computer software and accessories retailer Game operates from more than 600 stores, concessions and franchises across Europe and has built a loyal following among its customer base.

For example, its Reward-card programme has more than five million members and more than 70 per cent of all purchases made in-store use a Reward card.

Game wanted to develop an online sales channel for customers worldwide, while reflecting the type of service and loyal following it has built offline.

The retailer chose electronic payment company CyberSource to provide real-time payment services that could support shoppers on a global basis, alongside a fraud-screening product to ensure security. The payment and risk-management system was integrated with Game's infrastructure to protect its e-business from fraudulent transactions and chargebacks.

It was also essential that the brand created an online retail offering that matched its offline security, building trust among its existing and potential customer base.

"Our customers are technology-savvy, which is to be expected given our product offerings," says Kieron Smith, head of online operations for Game.

"It was vital to develop an online sales channel to make the purchasing process easy and efficient for customers, while making it available to customers worldwide."

SHOW FACTS: ECMOD
What: ECMOD 2006
Where: Earl's Court, London
When: 25 and 26 October 2006

Why: For businesses involved in direct selling, whether by traditional catalogue, online or via multiple channels, ECMOD gives visitors the opportunity to seek out new suppliers, keep up to date with industry developments and network with peers. As well as a full conference programme and exhibition running over two days, visitors can attend a full-day workshop on the 24 October, focusing on boosting companies' online presence.

ECMOD 2006: Speakers' corner

Speaker: Don Libey, president, Libey Incorporated USA

Session: The five next big things and the five next little things that will turn multi-channel marketing inside out

Time: Wednesday 25 October, 9.15-10.30am

Find out what issues will be affecting multi-channel direct marketing in the next 10 years. Libey's last visit to ECMOD was four years ago, and in this session, he will outline the changes he has seen in the market and offer his predictions for what the future will hold. Libey will express his views on online and search marketing, internet television and the future for Web 3.0 and Web 4.0, as well as providing key tips on how to survive in the multi-channel direct marketing environment.

Speaker: Alan White, chief executive, N Brown Group

Session: Multi-channel home shopping

Time: Wednesday 25 October, 12.00-12.45pm

Online activity is now joining catalogue and leaflet mailing, telemarketing and television as channels to customers

in their homes. Success in today's home-shopping arena involves gett-ing the right mix of activity to maximise the return on the marketing investment. In this session, Alan White will outline how N Brown has sought to differentiate itself from mainstream retailers by using a variety of channels to drive its growth.

Speaker: Tony Preedy, director of marketing services and e-commerce, Otto UK

Session: Turning data into cash

Time: Thursday 26 October, 11.15-12.00pm

This presentation will focus on direct marketing and e-commerce, in the context of all the tasks required to successfully run a profitable mail-order business. Preedy will look at how to use a customer database to create customer insight, how to determine the right amount to spend on recruiting and retaining customers, as well as how to create and use measures of customer profitability.

Speaker: Louise Townsend, senior associate, outsourcing, technology and commercial group, Pinsent Masons

Session: Data protection update

Time: Thursday 26 October, 12.00-12.45pm

This session will set out what is covered by the Data Protection Act 1998 and how this affects the home shopping sector. In particular, it will look at data protection notices and privacy policies, marketing compliance issues and fraud initiatives.