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Knol

Trust in the Real World

Money is built on trust. If I don’t believe that I can get some new goods in exchange for the piece of paper that you give me in exchange for my services, then I will probably choose not to work for you. While societies have made some peace with such paper, thanks in a large part to governments attempting to establish trust in currency with all the force of law, its limitations led to new forms of commerce. The new forms faced new trust issues as well, in many cases because they were born of private initiatives. In Chapter 6, we reprised the anecdote of The First Supper. The credit card associations have subsequently provided a variant of currency that drives commerce in general, and commerce on the Web specifically. It is interesting to note that the most recent television commercials for credit cards actually disparage the use of actual cash because it makes a transaction too slow. But, such was not always the case.

In the early days, while local credit card use could keep trust in the new form of money under control, it was immediately clear to both clients and merchants that fraud could very easily affect them. A thief duplicating a card and using it to make a purchase would result in a situation where the merchant would eventually ask the wrong person for payment. Depending on settlement modalities, this situation would directly affect the client, the merchant or both. Clearly, the banks issuing the cards needed to solve the problem, which they did by offering various guarantees of compensation to both clients and merchants in cases of fraud. That moved the liability for fraudulent transactions into the banking camp, which was then confronted with mounting fraud. This rather naturally followed from the precept that unanswered fraud leads to more of the same. That’s where the United States and Europe took two different paths, for reasons that were totally unrelated to the payment universe, as they had to do with the billing for telephone networks.

In the United States, the fees for telephone service were paid on a monthly basis, independent of usage as long as calls remained local. In France, which would take the lead in the management of fraud with the new form of money, local calls were metered and therefore telephone fees were based on usage, just as long distance calls are in the United States. This had the effect of discouraging merchants to make a call to verify the validity of the credit cards they were presented with. This in turn created opportunities for fraud. Conversely, in the United States, if the banks could offer merchants a local number to call for verification, they would have means to double-check the validity of a card prior to a transaction. Detecting and countering fraud in this manner became something of an art form for banks that were particularly good at it.

As the volume of payments by credit card increased, manual verification of transactions became impossible and therefore computers were brought to the party. The first thing that a computer can do very effectively is to check the card data against a revocation list that contains information about cards stolen or otherwise invalid. That’s why we are asked to report a lost credit card rapidly; the card issuer can enter that information in the database, and subsequent checks will return a warning. In the United States, virtually as soon as new information is obtained on invalid cards, it is available for double-checking thanks to the immediacy provided by the free local call. In France, in order to save money, merchants would typically wait until a certain number of transactions were completed before sending the bundle for processing via the phone line. Obviously, this left some opportunity for additional fraud, since merchants would not get immediate information on the validity of the card. To mitigate this threat, card issuers began to send out periodic revocation lists to the merchant. However, the manual processing of verification was still too cumbersome and new means of fighting fraud were sorely needed.

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