December 31, 2002, 12:00 AM

There’s a cost to keeping the criminals out—and it’s not always obvious

(Page 3 of 3)

When the MasterCard program rolls out, it will have three versions from which card issuers can choose. The simplest will be similar to Verified by Visa, requiring customers to select a password to compete a transaction. Another version will require consumers to store on their computers an applet that they click on when making a purchase. Customer identification information is transferred from the applet to the merchant for authorization. The final version requires the consumer to have a smart card, which retains the identification information. The card must be swiped in a device hooked up to the consumer’s computer.

Regardless of which version consumers use, the requirements are the same to the merchants, Bruce Rutherford, vice president of MasterCard’s e-business and emerging technologies, says. Rutherford believes that the password version will initially be the most popular, but says MasterCard wants to be ready for when smart cards take off in the U.S. and also have options that can serve other parts of the world.

Still, the upfront investment to the merchant appears minor. If the retailer’s payments processor already is participating in the credit card associations’ programs, as most are or will be, the software cost to most retailers is less than $2,000, says Avivah Litan, Gartner Group Inc. vice president of financial services. If a merchant processes its own payments, it may need to spend $50,000 or more on software, she says.

More confidence=more sales

In the case of, a participant in Visa’s pilot program, Visa bore the software cost. However, other merchants who were not pilot participants will have to pay for their own software. Tower Records, for instance, paid $10,000 to participate through a software provider approved by Visa, Arcot Systems Inc., says David Harris, Tower Record’s direct-to-consumer project manager.

Gany Karim, manager of fraud and risk, believes the cost is a bargain. “This has significantly helped us with our fraud problem and we’re seeing a huge increase in the number of customers converting over to participate,” says Karim.

Tower’s primary goal in participating in the program is to gain additional sales by attracting consumers who might have previously hesitated to shop online because of the lack of identification protection. “We’re hoping the extra sales we see this Christmas alone will pay for our cost of participation,” Harris says.

Tower went live with the Visa program in mid-October and approximately six weeks later, 2% to 3% of online customers were participating in Verified by Visa. Harris says it was too early to tell if the company was indeed experiencing additional sales. He expects the participation numbers will increase substantially next April when Visa requires issuers to offer the service.

Participation will increase when Visa and issuers start promoting the service, retailers say. In fact, with consumer promotions by Visa-including a major TV ad campaign-and signup efforts that some large issuers were undertaking in the fall, the number of customers using Verified by Visa at tripled in October. also has promoted the service on its web site.

Other agree that for the program to be effective, merchants need to back up the consumer education provided by card issuers. Retailers need to reinforce the messages on their own web sites, says Robert Renzulli, vice president of product development for First National Merchant Solutions. That might involve explaining what the program is and how it works. Merchants also need to actively encourage customers to sign up for the service with their card issuers, Renzulli says.

But not everyone is sold on the program. Gartner’s Litan says many retailers are skeptical of the promises to shift chargeback liabilities. “E-retailers cite similar promises that were made, but never carried out, if they implemented checks for card verification codes from the physical card on their web sites,” she says. “They are also wary that card issuers will start classifying chargeback and fraudulent transactions under codes not covered by the rules.”

Keeping the connection

And while Verified by Visa appears easier for both consumers and merchants than past systems, there is still the risk that some consumers will have difficulty using the system. “The payer authentication applications have technical issues that could potentially turn consumers away,” Litan says. “For example, Verified by Visa is based on a centralized Visa directory. Authentication of a consumer-which occurs before payment authorization-requires several messages across the Internet, potentially making the system susceptible to failed connections. Also, e-retailer software manages the transition from consumer authentication to payment authorization, making e-retailers fully responsible for the integrity and security of the transactions.”

Tower has received the chargeback protection promised and has not had many technical programs with the implementation. Harris says most of the consumers know their passwords and are not having difficulty using the service.

Supporters believe the program will spur Internet sales. Renzulli says only 30% of Internet shoppers report they are comfortable shopping online anywhere. The remaining 70% will only shop at one or two locations where they know the retailer. When these consumers see the Verified by Visa sign, and later the MasterCard SecureCode, they will know it is safe to shop there, Renzulli says. And that should benefit all e-retailers.

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