he FBI recently reported that online merchants experienced another record year in 2003 for online fraud. The fraudster's targets ranged from small merchants working out of their homes to the largest online marketers.

The fraudsters use clever schemes to mask their identities and actual locations. They pretend to be in the United States using free e-mail addresses, but are actually operating elsewhere. On a recent visit to one of our clients, an online marketer of consumer products, we discovered a number of fraudulent transactions where the customers claimed to be in the United States but were really in Malaysia.

This was costing our client plenty. Not only was our client responsible for the chargebacks from the fraudulent transactions and the loss of its product, it was in jeopardy of losing its merchant account and being placed on the MATCH [list of risky merchants] due to excessive chargebacks.

The merchant's ISO dramatically increased its reserve account and the client's chargeback rate was approaching the card Associations' chargeback thresholds and potentially facing huge fines.

We expected to work with the client simply to improve its processes and procedures to reduce chargebacks, but found that many of the chargebacks were due to fraudulent transactions.

Fortunately, we had just completed another engagement with one of our merchant customers that was using Network Merchants iSpyFraud software and had virtually eliminated chargebacks for fraudulent transactions from its operations.

From our past experience with available fraud prevention solutions, we found that most companies offered only brick and mortar solutions. They assign a score to the transactions based on merchants' locations and frequency of purchases. These safeguards failed to address online transactions where customers purchase products routinely from a vast number of merchants in varying locations.

By prohibiting transactions that appear risky, these brick and mortar fraud protection companies were throwing out the baby with the bath water. They would leave customers without the merchandise, unhappy, and merchants without the sale, frustrated.

We recommended the Network Merchants iSpyFraud software to our client and within seconds of activation, with the help of Network Merchants' customer support, we discovered dozens of fraudulent transactions.

One feature this software offers is that the user can establish multiple rules that either deny the transaction immediately or flag it for review later. After analyzing the types and locations of the fraud our client was experiencing, we set up a number of traps that caught fraud instantly.

In less than a month, our client was able to reduce its fraudulent transactions to levels well below the established standards.

I spoke with Matt Schmidgall, one of the chief architects of Network Merchants Software to learn about the genesis of its operations:

Question: How did you get started in fraud prevention?

Schmidgall: A few years ago, I was contacted by an accredited Internet Domain Name Registrar who was experiencing about $44,000 a month in fraudulent transactions. They were told by their ISO that their account was in jeopardy. The company was using a conventional type of fraud software, but still had an 11% chargeback ratio.

I started working with their programmers to develop a system that could quickly help them out of the trouble they were in, and the end result after modifications and enhancements is the iSpyFraud product.

Q: What made your solution work and how is it different?

S: iSpyFraud is different than most of the other options available because the fraud rules can be adjusted specifically to each individual company. It works great whether you process 10 transactions a month or 10 million. It works for all online transactions regardless of the product. Currently the domain company has a chargeback ratio of less than 0.3% and processes more than 14,000 transactions a month. Many of our other merchant clients have experienced similar results.

Q: How does iSpyFraud software work?

S: Fraud filters eliminate the majority of fraudulent transactions in real time. The selected filters can be customized for each merchant, which are continuously updated to keep the merchant one step ahead of the fraudsters.

The iSpyFraud management tools give merchants quick and user-friendly control over their online fraud security system.

The control panel allows merchants to maintain their own good and bad customer list, edit filters, restrict access by banning IPs and set up and maintain filter controls.

iSpyFraud has integrated the best research and online fraud protection tools which make it easy for merchants to reduce fraud. By effectively protecting merchants, ISOs, MSPs and financial institutions save legitimate customers and help merchants stay in business.

Q: How can ISOs and MSPs benefit from the iSpyFraud software?

S: ISOs, MSPs and financial institutions that sign up with iSpyFraud earn residual commissions on every transaction scanned by the software. You set the fee for the service and make the difference from the small transaction fee we charge. For a limited time our affiliates can earn 100% of the set-up fee.

Q: Besides the fraud protection services, do you offer any other products?

S: Yes. Network Merchants offers a fully functional gateway that delivers a host of other services including ISO and MSP private labeling, free recurring billing, load balancing between multiple merchant accounts and electronic check processing.

Q: Can you explain what makes you different from other gateways?

S: We private-label ISOs and MSPs so that they can offer gateway services directly to their merchants. They set the price for the services and we pay them the difference from what we charge. ISOs and MSPs generate revenue on set-up fees, per transaction fees and monthly fees.

Q: Does Network Merchants have any other affiliations or accreditations?

S: Network Merchants is proud to be one of the only certified PAGO gateways in the United States for international transactions, which allows us to accept multiple currencies. We have also teamed up with Western Union to offer Swift Pay, where customers can pay for online purchases with cash at any of more than 40,000 Western Union locations nationwide. The iSpyFraud software has worked so well that we continue to refer our e-commerce merchant customers to Network Merchants for its gateway services and iSpyFraud software. Fraud is not going anywhere soon. iSpyFraud software is a great tool to help the merchant cut down on chargebacks for online fraud, which can make the difference between the MSP and ISO losing a high volume income producing merchant and being exposed to chargeback losses and fines from that merchant. For further information regarding iSpyFraud or any other Network Merchants services, visit them directly at www.networkmerchants.com .

David H. Press is Principal and President of Integrity Bankcard Consultants, Inc. Phone him at 630-637-4010, e-mail dhp@integritybankcard.net or visit www.integritybankcard.net.