credit card and tax fraud in the internet trading age
The first problem: Credit card fraud
Currently, the most convenient method of paying for goods over the Internet is by bank credit card. The customer releases details of their credit card to the trading company as part of the payment process. The bank then credits the account of the trader as electronic sales payment slips are received.
The problem of hackers stealing credit card numbers while they are being transmitted over the internet has effectively been solved by the adoption of "public key" cryptography but hackers can still break into the file servers of small web traders and steal data. Market research suggests that 75% of European Internet users are wary about releasing their credit card details over the Internet1, mainly because Internet shopping does not offer the eye contact reassurance associated with shop based retailing.
The second problem: Import duty and sales tax avoidance
On-line shopping currently poses two tax avoidance problems for governments: (1) Avoiding import duties and, (2) especially in the U.S.A., avoiding sales taxes. Although this theme is mainly concerned with innovation in the U.K., we need to address international issues because of the global nature of internet trading.
Solving the fraud problems: a possible way forward
Existing debit based Internet banking systems allow customers to make secure direct payments to Internet traders but they don't have mass market appeal because they are not as quick and flexible as credit card based systems. We propose that a new Internet payment system is devised which does not require customers to release their credit card details but still offers the speed, simplicity and credit facilities of the existing credit card system. Our proposed system will also simplify the raising of taxes from Internet shopping transactions.
We envisage a system whereby the trading company provides an order number and the number of its paying in account, so that the customer, after obtaining a price for purchasing their goods can pull down a menu on their computer screen, which links them directly to their own bank. Details of the maximum payment to be made against the order number would be entered into a dialogue box which appeared on the computer screen. This information would then be sent directly to the bank. The bank would check that the Internet trader was an approved solvent business, then transmit a "Request to Make Payment against Order Number" message, to the customer. The trader would then claim credit from the bank, against this order number, as the various goods were dispatched. If some of the goods are out of stock, then the total credit transferred to the trader would be less that the maximum permitted payment, as for existing credit card based payments. Thus, credit card style convenience would be provided, without the customer releasing details of their credit or bank account details to anyone, except their own bank.
Keeping the banks happy Under our proposed system, banks would still take a profit by collecting a service charge from Internet traders, but bank overheads would be reduced compared with the existing system, because the problems associated with Internet credit card fraud would be reduced.
Collecting taxes According to our proposed credit payment system, the banks could act as paid sales taxes and import duty collectors, with the payments being made directly to the government, from the customer's bank account at the same time that payment is made to the Internet trader. The bank would send the Internet trader a revenue payment code number, allowing the trader to attach a related bar code to the label on the goods being delivered. This bar code would allow tax inspectors and customs officers to scan packaged goods, to check that the required taxes and duties had been paid. Electronic transactions and computations can be carried out quickly and efficiently by modern computers, so the tax collection payments made to the banks would only absorb a modest fraction of the tax revenues.
1Maija Pesola, 75% of Europeans still wary about online shopping, The Financial Times, Dec 11, 2000. (ii) Online buyers get hi-tech guarantees, The Times, Dec 8, 2000.