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Why aren’t more shoppers using virtual credit cards?

by Lynnette Khalfani_cox
Why aren’t more shoppers using virtual credit cards?

When credit card companies first introduced virtual credit cards – sometimes known as disposable credit cards or “single use” cards – the industry thought they would be a big hit with consumers.

After all, virtual credit cards allow people to shop online securely without sending their real credit card numbers over the Internet, where such data could be exposed to hackers.

Despite the explosion in online shopping – Americans spent $38 billion online in the first quarter of 2011 alone – virtual credit cards haven’t gone mainstream. The main problem: consumers often find disposable cards too cumbersome and time-consuming to use.

Consequently, most Americans still shop online using traditional credit cards and debit cards, which represent 40 percent and 29 percent of all e-commerce transactions, respectively, according to Javelin Strategy & Research.

Meanwhile, only a handful of major credit card companies even offer virtual credit cards.

“They’re just too hard to use,” says Larry Seltzer, a freelance analyst and consultant, and a contributing editor for PCMag.com. “When you want to buy something online, you don’t want to have to go through extra steps to do it.”

How to get a virtual credit card

When you’re on a website and want to purchase something using a virtual credit card, you must first go get a single-use credit card number free of charge online from your credit card company, if it offers them.

Among the credit card companies that offer disposable cards are Bank of America, Citibank and Discover. Each product goes by a different name: Bank of America’s is called ShopSafe; Citibank’s is dubbed Virtual Account Number; and Discover’s is called Secure Online Account Number.

Whatever the issuer calls them, virtual credit cards work in a fairly uniform way.

How a virtual credit card works

Banks issue single-use card numbers that feature a randomly generated substitute account number that’s used in lieu of your real credit card number.

You establish the maximum amount that can be used on your virtual credit card, and you can set an expiration date too.

Typically, consumers know how much they are going to spend online for a transaction, so they set the maximum for that exact amount. For instance, if you’re making a $117 purchase with an online merchant, you would obtain a virtual credit card with a $117 limit. Once you buy something, a disposable card can’t be used again.

You can use a virtual credit card to purchase goods and services online, over the phone or through the mail. But the cards can’t be used in stores or at place like hotels and car rental agencies, which require you to present your normal plastic credit card in person.

Why go virtual when your real card offers fraud protection?

Another obstacle to the acceptance of virtual credit cards: Americans simply aren’t financially motivated to use them.

“Part of the problem is that U.S. customers know that they’re protected from fraud,” Seltzer says. “So perhaps that stops them from being as careful as they should.”

“Zero liability is a disincentive” to widespread use of disposable credit cards, Seltzer notes.

Paul Stephens, director of policy and advocacy for the Privacy Rights Clearinghouse, a consumer advocacy group, agrees.

“There’s really not a whole lot of reasons to use disposable credit cards because you’re not responsible for fraudulent charges made with your credit card anyway,” he says.

Under the Truth in Lending Act, your liability for any unauthorized purchases made before you report a lost or stolen credit card is limited to $50. Plus, major banks offer “zero liability” protection for fraudulent charges, so they typically won’t even make you pay that $50.

When a virtual credit card makes sense

Still, Stephens thinks single-use credit cards could be a good idea in certain situations, such as preventing merchants from adding recurring charges to a card, or helping consumers avoid unwanted billings, like monthly magazine fees or other subscription offers.

“I suppose a disposable credit card might also be a handy tool if you’re buying something online from someone you perceive to be a shady retailer,” Stephens says. “But then why would you be doing business with someone like that in the first place?”

Stephens urges consumers to safeguard their credit card information by limiting shopping activities to Internet sites that take security precautions. If the URL (web address) at checkout starts with “https://” with a telltale “s” then you know a site is using a secure server.

As for future use of virtual credit cards, experts aren’t optimistic.

“I think it’s considered a failed thing because it just can’t be made convenient enough,” Seltzer says. “It’s a shame, especially when you think about all the credit card disclosure problems and everything that happens with online fraud.”

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