FTC Official Warns Top Acquiring Execs To Do More About Online Fraud

The extent of government scrutiny of the acquiring business came into sharp relief on Wednesday as a federal official told an audience of top-level executives with processors and independent sales organizations that online transaction fraud is too high and that the executives must do more to bring it down.

“There is still an enormous amount on online fraud—I would say it’s intolerable,” said Lois Greisman, associate director for the division of marketing practices at the Federal Trade Commission. Online fraud often arises from merchants that sell products such as prescription drugs, counterfeit merchandise, pornographic materials, bogus IDs, or tobacco products.  In some cases, the merchants collect payment but don’t deliver the goods, then move on to set up other identities online. In other cases, the products themselves are legal but their sale online is not.

Greisman was critical of processors and ISOs that pay attention mainly to chargeback rates, a measure that increases in cases of fraud as consumers find they have been duped by unscrupulous merchants or have detected transactions on their statement that they did not authorize. She argued that a significant number of fraud cases stem from online merchants whose chargebacks are within normal bounds.

“We have sued many merchants whose chargeback rate is below 1%,” Greisman told the audience at the Electronic Transactions Associations’ annual Strategic Leadership Forum in Palm Beach, Fla. Chargebacks, she said, are just “one piece of data” in detecting fraud.

Greisman’s point about chargebacks came in response to an observation by Martin Elliott, head of Americas acceptance risk and global brand protection at Visa Inc., that the chargeback rate has leveled off since a “spike “ in 2008-2009. Elliott appeared on the same panel at the conference with Greisman. Also speaking on the panel was Linda Kirkpatrick, group head, customer performance integrity, franchise development, at MasterCard Inc.

Greisman took the opportunity to remind the audience they should stand ready to report cases of suspected fraud to the FTC or other regulators. If they don’t, she warned, they risk being tied to the fraud. “If you see something that is wrong and you stick your head in the sand, you may well incur liability,” she said.

While some in the acquiring business have said this position in effect deputizes acquirers on behalf of government authorities to root out fraud, Greisman rejected that argument. “My job is not to deputize you,” she said to the audience. “I totally disagree with that. My job is to make sure you know the parameters and that you stay within the parameters.”

Nor, she said, will the authorities sympathize with acquirers that are found to have a few fraudulent online merchants in a portfolio made up largely of legitimate sellers. In such cases, she warned, “it won’t be sufficient for you to say, ‘I have a couple of rogue merchants.’ I don’t find that acceptable. I don’t think you should find that acceptable.”

Elliott warned the audience that both the FTC and the U.S. Department of Justice are looking more closely at online fraud and acquirer involvement, with the latter agency having established a “working group” to examine sales-agent activities. State attorneys general are also more active, he added. As a result, he said, acquirers tempted to abet fraudulent merchants are more likely to be detected. “If you think you’ve got a cloak covering you, you’re wrong,” he said.

Both Elliott and Kirkpatrick credited network programs—the Global Brand Protection Program in the case of Visa and MasterCard’s Business Risk And Mitigation Program—with stopping significant numbers of fraudulent online merchants.