Credit Fraud Fees Gall Merchants

From the Appalachian foothills in tiny Keyser, West Virginia, Gary Howell's auto parts business has known the internet's promise and it's peril.

"We've shipped Neon parts everywhere from Moscow to Singapore."

He opens a drawer filled with manilla folders records

"These are all fraudulent credit cards," Howell told Orr.

"All of these!" said Orr.

"All of these."

Howell has lost tens of thousands of dollars to fraudulent transactions. But what galls him most are the fees credit card companies charge him for each bogus order, reports CBS News Correspondent Bob Orr.

"They charge us fees for being the victim of a crime!" he said.

Internet commerce is exploding -- up 23 percent last year alone to $69 billion. One of every 50 online transactions is fraudulent -- and every bogus charge winds up costing both merchants and consumers.

"We eat losses, we have to raise prices," Howell explained.

The problem is internet merchants never see the customer or the credit card, and that carries a risk. For example, say someone in Washington orders fresh salmon from City Fish in Seattle.

If the card number turns out to be stolen or fake, the merchant can take a triple hit. He loses the money from the sale, loses the fish if it's been shipped and pays a penalty on top of that.

From his tiny shop in Lititz, Pennsylvania, Tom Mahoney runs "Merchant 911," a website that offers fellow vendors anti-fraud tools he says the credit industry doesn't.

"I firmly believe there's a financial incentive for them not to protect the merchant," Mahoney said.

"Because they're making money on the bogus fees?" asked Orr.

"That's correct."

No, says the industry -- that's ludicrous.

"Credit card companies absolutely have a vested interest in minimizing and preventing fraud," said Nessa Feddis of the American Bankers Association. "There is a cost associated with an invalid transaction. And the fee is intended to help recover those costs but also to encourage the merchant to be more careful."

Small businessmen feel the credit industry should share the burden.

"I don't like accepting all the risk for multi-million, multi-billion dollar corporations," Howell said.

But, until a better fraud-fighting system is developed, the "little guy" will be largely on his own, and often on the hook for losses.