Small to mid-sized businesses with e-commerce arms can be duped by fraudsters who type in bogus credit card numbers and complete a transaction. But the credit card verification techniques frequently called upon may not catch the problem.

Specialized credit-card-fraud-detection software can help here.

The average company has seen a 22 percent increase in fraudulent activity since 2005, with information theft -- including stolen credit card use -- up by 27 percent, according to September 2008 report published by Kroll, a risk consulting company based in New York. Those increases are largely driven by the credit crunch and the tough economic climate, according to the report, titled the Kroll Global Fraud Report.

Fraud detection software can take a bite out of those numbers and help small to midsize business owners’ bottom line by slashing credit-card chargeback costs, say the makers of such software.

Costs can be high

But be forewarned, the software doesn’t come cheap to the small business owner -- running as high as $2,500 per month. So you’ll have to consider if it’s for you. If you’re selling expensive goods via the Internet, weigh software costs against chargeback costs that will affect your bottom line, experts say.

You can purchase fraud detection software that determines whether the buyer actually holds the credit card with which he or she is using to buy your goods online. Or you can choose hosted software.

Catch the thief before the crime

The software itself is activated when a customer purchases merchandise or services via the website. It analyzes each transaction to verify authenticity, says Kevin Johnson, chief executive officer at eBates.com, which offers what it calls online cash back shopping. Customers who join eBates.com receive discounts when they buy merchandise from several online retailers.

The online retailer had already developed algorithms to spot patterns of fraud in online transactions. The system might flag a returning customer who suddenly makes a much larger purchase than usual.

“But we’d always spotted it after a transaction,” Johnson said. “With fraud technology, we can prevent fraud from happening in the first past and never pass on a fraudulent transaction to our merchant partners.

“In a down economy where more people are tempted and desperate this is more important,” he adds.

Can’t corner every suspect

Consider such software if your company does any type of online commerce in which buyers use credit cards, says Reed Taussig, chief executive officer at ThreatMetrix of Los Altos, Calif., which makes the software used by eBates.

Michael Ferranti, chief executive officer at Endai of New York, which makes stolen credit-card screening software.  admits no foolproof method exists to screen every stolen credit card purchase. The theft may have been so recent the victim doesn’t even know the card is gone, says Ferranti. Nevertheless, stepped-up algorithms means software can screen out more deceptive purchases than in years past, he says.

Today’s software mostly focuses on a common type of credit-card abuse: purchases made from a hacked computer.

ThreatMetrix, for example, can determine whether a user’s IP address has been compromised from abroad. Taking over a computer in this manner -- without the owner’s knowledge -- is the most common form of credit-card fraud, Taussig says.

But expect to pay for this type of protection. Costs for his company’s software -- offered via the software-as-a-service model -- run $2,500 per month.

Keep loyal customers

Taussig offers another benefit to the today’s credit-card fraud-protection software. Because it’s focused on isolating sales made from compromised computers it doesn’t flag the longtime, loyal customer who happens to make an out-of-character purchase.

“You get to keep those customers,” Taussig says.

SIDEBAR: Tips to Prevent Online Fraud

Don’t rely on one solution to catch all online fraudsters. Here are some tips to help prevent online fraud.

  • Talk with other merchants. Sounds strange, but the Global Fraud-Fighting Community joins members who securely share order information to increase fraud knowledge while cutting down on fraud losses.
  • Know your numbers. Track the amount of fraud you see and your chargeback rate, Ferranti says. Measure these baseline metrics to determine whether newly implemented software is doing its job.
  • Aim for a low fraud rate -- less than 0.2 percent, based on chargebacks, say Global Fraud-Fighting community members.
  • Use a variety of fraud-prevention tools. In addition to verifying credit card user data, look to address verification services. And manually check around 10 percent of customer orders, members say.