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Survey: E-tailers Facing a Double Whammy

Online retailers are facing a double whammy, getting hit not only by Internet fraud, but also by the credit card companies, says a new industry report.

A new survey of more than 160 companies by tech research and consulting firm Gartner Group found that 12 times more fraud exists for Internet transactions than in the bricks and mortar retail world, and that e-tailers are paying credit card discount rates that are 66 percent higher than traditional retailer fees.

Moreover, Web merchants bear the liability and costs in cases of fraud, while credit card companies generally absorb the fraud for traditional retailers (as long as the retailer follows procedures and saves a physical signature on a credit card transaction receipt).

Surveyed e-tailers reported that their average credit card discount rate was 2.5 percent plus about 30 cents a transaction. The same average for traditional retailers is about 1.5 percent plus 30 cents a transaction. And another difficulty for the online businesses, according to the Gartner survey, is that e-tailers spend about four times more to resolve and process chargebacks than ordinary retailers do.

Furthermore, e-tailers must pay for Internet payment gateways and fraud detection, which can add another 50 cents or so to each transaction.

"There is no incentive for a credit card company to break this unfair fee structure for e-tailers," said Avivah Litan, research director at Gartner Financial Services. "However, the credit card issuer that is bold enough to lower the fees online could create a real competitive advantage on the Web and possibly gain early market share among e-tailers and Internet shoppers."

"In the meantime, several savvy startup competitors are giving e-tailers alternatives to credit cards, such as processing that accesses bank accounts directly or via closed loop systems," Litan said. "At the current rates, those firms could give the card companies a run for their money."