Small business will complain this week they are facing a bill for internet fraud that is rising so fast it threatens e-commerce.

The Federation of Small Businesses (FSB) has written to Stephen Timms, the e-commerce minister, of their concerns. Stephen Alambritis, the federation's head of parliamentary affairs, points out that internet fraud costs the British economy £28m a year, compared with £3.8m in 2000.

The liability on the retailer "is acting as a disincentive to trading online," he writes. "For the small business community to fully embrace e-commerce, we need to work towards a liability shift so that the issuing bank is liable in the event of cardholder-not-present fraud in the same way as the card issuer is liable in the event of cardholder-present fraud."

Tim Fallowell, director of specialist optical equipment supplier Focus Optics, is one of those being put off e-commerce by the risk of credit card fraud. He swallowed chargeback costs of £3,000 through fraudulent orders placed over the phone.

Some small to medium-sized companies (SMEs) are going offline after taking one too many hits. David Barrett, director of Cybercomp, which sells computer parts, shut his website after getting stung for £2,500. He thought he was protected after signing up to use WorldPay's e-payment processing system and getting authorisation for transactions from NatWest. "Authorisation means noth ing," says Barrett. "I thought that if anything went wrong the bank would bear the brunt. When I had chargeback, I just closed the website."

Confusion over what authorisation means is a problem highlighted in the letter. "Many small businesses are not aware that when a transaction takes place over the internet, credit card authorisation is not a payment guarantee," says Alambritis.

In reality, as the Credit Card Research Group says on its website, authorisation "only indicates that the card has not been reported lost or stolen and there are sufficient funds available in the cardholder account."

The FSB fears that cardholder-not-present fraud will grow as the banks focus on tackling cardholder-present fraud.It welcomes the £1.1bn investment in chip and PIN, with plans to roll out smart cards nationwide by 2005, scrapping the need for signatures that can be forged.

However, John Walker, FSB policy chairman says: "There is a danger that as chip and PIN takes off, fraudsters will just use the internet instead."

APacs is unlikely to budge on the liability issue. Kay Worobec, its head of fraud prevention, says: "Cards weren't set up to be used for non present payments. In the longer term, we are looking towards chip and PIN technology and this should help all of us in the fight against fraudsters."

Worobec says traders could sign up to Visa's Verified scheme and MasterCard's SecureCode to protect themselves. Both require cardholders to enter their code for online authentication. Hugo Bottelier, head of Verified by Visa, says it "should lead to an 80% reduction in chargeback disputes," but the scheme is in its infancy and there are costs.