All About Fraud

(Ping! Zine Issue 13) – Fraud, pronounced, frôd, is a deception deliberately practiced in order to secure unfair or unlawful gain.  This is a term that industry-wide is not liked.  Internet fraud is one of the largest categories of fraud, and as it may seem to be getting even larger, I’m hoping this article will show you how you can prevent fraudulent transactions from approaching your business!  In this article, I will explain to you how the entire fraud system works including, how credit card theft occurs, money figures of the amount large companies spend on charge back fees and as well, provide you with methods that will help you prevent fraudulent transactions.

What causes credit card theft?

When was the last time you received a spam e-mail appearing to come from PayPal asking you to update your account information?  Well, believe it or not, this is one of the ways fraudsters get ahold of credit card information.  Because most individuals do not see that it’s a fake e-mail (as the e-mails appear just a like regular PayPal e-mails with the official e-bay heading, they fill out the entire form, giving their credit card information, address, phone numbers, name, e-mail address, and on some accounts, even Social Security numbers.  As you may like to ask, ‘Well, why don’t people just ensure that it’s a secured SSL site, and look at the domain name in the address bar when clicking on the link in the e-mail?’  Truth is, most people do not know to check for this.

Other methods of credit card thefts can be as easy as leaving paper trails behind, such as gas station or ATM receipts.  Both normally have the name and the last credit card digits on the receipts, which is a security risk.  When fraudsters are desperate enough, some may even go through your mailbox, which is why MSN’s MoneyCentral suggests securing your mail by locking your mailbox, or getting a P.O. box for important mail. 

The Cost of Fraudulent Transactions on Companies

As you could imagine, for every charge back that you get, you pay for it regardless if you win it or not.  Charge back fee’s can range from $15 all the way to $55 depending on the merchant provider or bank you use to process credit cards.  During my beginning ages as CEO of HostNetway, I received a total of approximately $600 in just one week!  Now, at this period of time, I only had a few customers, and no anti-fraud systems in place, so you can imagine what the large companies, such as Sago Networks or Hivelocity, go through.  I had a chance to speak with Adam Dillaplain, Senior Manager of Sago Networks, a large dedicated server and colocation provider.
“We pay out about $1,000/mo just on chargeback fee’s, despite the anti-fraud methods we have in place,” Dillaplain said. “Ninety-nine percent of those are pre-qualified but fool our billing department as they are generally perfect duplications of ID.  Before we charge any credit card, we always have the customer send in their ID and a photo of their credit card which helps us cut down on fraudulent transactions.”

Sago has put in place what I like to call, dual protection, which I will tell you about later on.  Another representative I spoke with is Brian, Vice President of Operations at Hivelociy, a mid-sized dedicated and colocation provider.

“We spend about $500/quarter on chargeback fees, if that. Because we require photo ID, our fraud transactions are cut down a bit,” Brian said.  These are statistics from only two companies out of the thousands that are out there. In all, the amount spent on chargeback fees would average out in the high thousands per quarter – and that’s just on chargeback fees.  What can we do to protect ourselves?

How to Protect Your Business from Fraud  

With today’s technology, companies have produced anti-fraud systems such as Varilogix FraudCall solution, or FraudGate.  Varilogix is a leader in online telephone fraud verification services, providing cutting edge fraud prevention and detection verification technologies.  Their FraudCall product places a call to the customer while they are ordering through your website.  FraudCall verifies your customer’s identity and the validity of their transaction by using a single or four digit pin code entered into their telephone key pad.  Then at the end, it will also require your customer to record a digital voice signature used as authorization.  The reason why this system is so successful is because no real fraudster will put their actual phone number on a form, because they would end up in jail! 

Now, for most potential customers, this can be annoying, because they may not want to go through all the hastle, however due to all the security risks these days, this is a needed procedure. By not using verification, you are at risk to have a spammer on your servers, which can cause high loads, and can even cause your server to appear down.  You are also risking a chargeback fee if the customer is not legit, which of course is not pleasant.  If the customer is legitimate, and you have a fraud signup that by chance is a massive spammer, then you would be at risk to having your legit customer leave you.  Another plus is systems such as Varilogix or FraudCall can easily be integrated into major billing systems such as ModernBill, WHM Autopilot, Lpanel, DRAMS and more.

Now, for those who don’t like the costs of systems such as Varilogix or FraudGate, then this one is for you.  However, it really only works with credit card transactions — not 3rd Party providers such as PayPal or 2CheckOut.  Upon the completion of a customers sign up, you should fax or send them a form via e-mail asking them for a photo of their credit card, and a Drivers License or State ID.  However as Adam from Sago Networks has stated, it isn’t positive that the person is legit.  Sago Networks has both systems in place — faxing of Drivers License/State ID and credit card – and just recently added, call verification, so that if one method fails, the other will pick up if the person is valid or not, which is what I refer to as dual protection.
Giving warnings such as “Your IP is being recorded for security reasons,” and actually recording their IP during the process can also help keep fraudsters away. Although it may not be as effective as the previously mentioned methods, it can work. It is recommended that you actually do a lookup on the IP, and see that it matches the location put on the order form, and call the phone number to see if you get a fax machine or an actual live person, and welcome them to your company as this is used for fraud verification as well.

Fraud can literally end a company that does not have anti-fraud methods, especially in the early stages of building a web hosting company.  I was inspired to write this article from various users of the well-known community who have posted comments about receiving a large amount of fraud orders.  I was interested in writing and article with the facts about theft, fraud and how it can be stopped.

For more information on anti-fraud sytstems, please visit the following websites:

FraudGate –   
Varilogix –

Kenneth Odem is the CEO of HostNetway Internet Services, based in Raytown, MO.  HostNetway offers dedicated servers, colocation, reseller hosting and shared hosting services.  Kenneth spends most of his time browsing the forums helping users of the hosting community.