commentary Internet shoppers once again have reason to question whether Visa and MasterCard are the best means for buying online.
People have taken to Twitter and online forums to express shock about a compelling expose published in The New York Times on Friday. The story focused on an online retailer with a dubious history of customer service that included responding to complaints from unhappy patrons by allegedly threatening their lives. The newspaper reported that Vitaly Borker, a resident of New York, had generated so many complaints from selling eyewear on his site, DecorMyEyes.com, that all the negative comments had served to raise his site higher in Google's search results.
Besides finding potential problems with Google's search algorithms, David Segal, the story's author, unearthed all kinds of e-commerce collateral damage. Among the companies that should be embarrassed by the report for either failing to protect customers or an inability to track down rogue retailers were eBay, Citibank, and the Internet Crime Complaint Center.
The reputations to suffer most were those of Visa and MasterCard, two of the nation's largest transaction companies.
Among the many complaints about Borker was that he refused to issue refunds and one of the ways he got away with it was due to an apparent flaw in Visa's and MasterCard's security systems.
Red flags go up at Visa and MasterCard if a merchant generates too many "charge-backs," the term used to describe when a customer successfully disputes a transaction and obtains a refund. This is what the Times wrote: "Precisely how many of these charge-backs is too many is one of the few business subjects that Mr. Borker deems off the record, but suffice it to say he tracks that figure carefully and dials down the animus if he's nearing his limit."
A year ago, I heard about how some merchants with ill intent game Visa and MasterCard's systems. I was speaking to a source who once worked at some of the so-called post-transaction marketing companies that were investigated by the U.S. Senate last year as part of one of the worst online retail scandals in history.
Companies such as Vertrue, Webloyalty, and Affinion paid a large number of top e-tailers, including Orbitz, Buy.com, and Priceline to allow them to charge the credit cards of their customers even though the customers never supplied the card number. A shopper would be nearly done completing a transaction and would be presented with an ad that typically offered some free service. Often the ad appeared to be coming from the merchant.
Plenty of people didn't see the tricky small print buried in the mass of ad copy.
A Senate subcommittee found that maybe as many as a million people were duped by this "scam" and were unknowingly paying these companies every month. The retailers and marketers walked away with hundreds of millions of dollars.
The source, who continues to be employed in online marketing, said that one of the reasons managers at Webloyalty and competitors were able to operate under the noses of Visa and MasterCard was that it was so easy to game the system. They knew exactly the number of charge-backs they could acquire before having to scale back operations, the source said.
To be fair to the credit card companies, this isn't an easy problem to solve, as people like Borker are well aware. The Internet offers a perfect way for unsavory characters to mask their identity. Borker told the Times: "If Visa and MasterCard ever shut me down, I'd use the name of a friend of mine. Give him 1 percent."
To MasterCard's credit, the company did shut down Borker, at least for a little while. Noah Hanft, a MasterCard lawyer told the Times that it booted Borker for going over his charge-back number. Nonetheless, the company has no idea how Borker was allowed to continue accepting MasterCard transactions.
"No system is perfect...keep in mind, millions of transactions are conducted on our system every day, with 30 million merchants," Hanft told the Times.
That is almost exactly what Visa and MasterCard representatives told me during the post-transaction marketing scandal.
In the wake of the Senate investigation into that mess, Visa and MasterCard promised to do more to protect shoppers. It doesn't appear they've done enough.
For now, all consumers can do to protect themselves is look for safer ways to buy online. Earlier today, Peter Pham, a venture capitalist and former Photobucket exec, posted a note to Twitter that included a link to the Times story. Pham wrote: "Why I only use Amex."