Negative Database Screening and Online Credit Card Payment Processing

18 June 1998

A "How-To" Guide for Online Gaming Companies

There's an important lesson for the online gaming industry to learn by looking at the near-death experience the audiotext industry experienced a little more than ten years ago.

But, first, a primer. Audiotext, for anyone still not familiar with the term, is a wide range of information and entertainment services offered over the telephone on a pay-per-call basis - things like adult fantasy (phone sex), psychic lines, horoscopes, legal services, and much more. In the mid-to-late eighties, this industry was at roughly the same stage of development as the online gaming industry is today. Things were looking very promising. It was all profits, profits, profits. Everything was coming up roses, you might say.

Then, suddenly, things changed dramatically. Within just a year or two, audiotext had become an industry under heavy attack and on the verge of total failure as the result of a sudden and massive industry-wide accrual of credit card chargebacks and credits. This tidal wave of negative financial adjustments was, in turn, brought on by the unanticipated and widespread incidents of credit card fraud during the purchase of the services being offered by the various businesses that comprised the industry. Seemingly untouchable fortunes vanished overnight. Panic set in as company after company failed.

But then things changed again - for the better. And today audiotext has grown up as an industry. It is still around, and it's once again making a lot of money for a lot of people.

"So", you're probably asking yourself, "what changed?" What turned things around and saved this industry? What leveled the playing field and allowed this industry to become one of the most phenomenal business success stories of the past decade?

One thing: the development of what is known as "negative database" technology, and the use of this technology by almost all audiotext companies to screen each and every credit card transaction attempted. Once this screening procedure became standard practice in the audiotext industry, the incidence of fraud and the resulting credits and chargebacks began to drop sharply, eventually tapering to a level that the industry could sustain and, indeed, prosper under. In fact, in some types of businesses within the industry, the incidence of fraud dropped to negligible levels with the use of this technology.

So, yes, there is a lesson in this recent history for all companies that are involved in the online gaming industry - an industry that is currently facing many challenges similar to the audiotext industry at a similar stage of development. It would be a wise and proactive move for the online gaming industry to equip itself with negative database screening technology, and to embrace it immediately as an industry-wide standard for operating an online gaming business. Generally created, maintained and offered for use by larger companies that provide settlement services to smaller businesses under contract, negative databases are essentially self-descriptive. They are large centralized collections of assorted negative profiling data that are the result of the meticulous monitoring and tracking of credit card usage and activity patterns worldwide.

These data collections are ever-changing and ever-growing, continually being supplied and updated with negative histories on credit card numbers and other related data sets such as names, telephone numbers and addresses. The technology involved enables the most sophisticated systems to update their profiles in real time with every single transaction event that takes place anywhere in the world. The database not only keeps track of cards reported as lost or stolen - an obvious risk to any merchant - but also keeps track of card numbers (or associated names, addresses and phone numbers) that have an unusual and troublesome history of chargebacks, credits, returns or other problems for a merchant.

The screening process is very simple. Whenever a specific pre-determined type of credit card transaction is attempted on a company's Web site, the supplied information is automatically run through one of these negative databases to see if there has ever been an unpleasant experience with that particular card number or cardholder in the past. If the card number is found in the negative database, the charge request is automatically denied, saving the company from the risk of selling to someone who, at least once in the past, caused problems for another company. If the card number does not appear in the negative database, the request is authorized. It is all done within seconds.

Remember, there are more than 365 million bank credit cards in use in the United States today. Although other methods of making electronic payments for online gaming services are available, the vast majority of your customers are going to want to use a credit card - still the most popular form of payment for online goods and services, including online gaming. The bottom line is that, if you want to stand a chance of survival in the industry, you have to accept credit card payments. In doing so, you open yourself up to the higher-than-usual risk of fraud posed by these "non-face-to-face" or "card-not-present" transactions.

As the experiences of the audiotext industry prove, credit card fraud can be a serious threat to the very existence of your entire industry. Few factors can have a more negative impact on the viability of any individual online gaming company. Fraud can quickly sink a company struggling on the verge of success and keep even the most successful online gaming companies bogged down and performing sluggishly.

Of course, negative database screening is no longer the only protection available or the sole solution to the problem. Since its development, many other systems and processes have been created to protect online merchants from credit card fraud and misuse. Negative database screening works best when implemented as one part of a well-tailored package of fraud prevention measures, working in sync with things like Secure Socket Layers (SSL), Password Verifications, Address Lockouts, Hacker Alerts and Address Verification Systems.

Negative database screening, when properly executed, can play an important role in guaranteeing the security and the integrity of every sale you make.

Christine Bednar is a partner at Signature Card Services, (213) 930-0050. Signature Card has assisted several online gaming clients obtain merchant accounts using Ecash and is available to answer questions regarding your online business.