Avoid Credit Card Fraud

Merchants need to avoid credit card fraud at all costs. This goes without saying getting hit by fraudulent orders affects the bottom line of any business. I was reading an article a while back about one of the bigger travel agencies on the Internet who wasn't able to get out of the red ink simply because they are getting so many fraudulent orders. Now this company may think they are too big to monitor all their transactions, but if they are in the red because of it, well then it's time to make some changes.

Smaller merchants with big-ticket items can be wiped out with just a few fraudulent orders; sometimes it only has to happen once. I wrote an ebook, "Protect Your Merchant Account from Fraud & Chargebacks" that goes into great detail on this subject. I will highlight some of it here.

Chargebacks happen when a cardholder disputes a credit card purchase. There are a variety of reasons a cardholder may dispute a charge. Some examples of these are:

• Never receiving the item ordered

• Not getting what they thought they were buying

• Their credit card was stolen and they did not authorize the charge

• They could just be a thief and use the chargeback clause to their advantage

In the event of a chargeback, the card-issuing banks will initiate a chargeback against the merchant. The funds for that sale are pulled from the merchant's bank account and the merchant may or may not be notified of the chargeback and be given the opportunity to dispute the chargeback. I was told by one really big acquiring bank that they were not obligated to notify the merchant of a chargeback. Anyhow, the merchant and merchant bank knows nothing of the chargeback until it is over and done with. Keep in mind, the customer's card issuing bank is the one who initiates chargebacks.

The most important part in accepting a credit card is to do your best to verify the cardholder is actually placing the charge. On the Internet, this can be done with AVS (Address Verification System). Not a 100% guarantee, but it is the best available right now. AVS will attempt to match a portion of the customer's credit card statement billing address against the billing address the customer placed during the order. If you get an address and zip code match, well chances are the actual cardholder or someone authorized to use the card placed the order. If you get a match of one or the other, then it is your call if you want to accept the credit card. I have a merchant who does between 13,000 and 15,000 online transactions per month and will accept a partial match, but rejects all that come back with no match. His chargeback rate is pretty low and this seems to work for him. If you do not get any match, then you need to sit on the order, jump up and down on it, and chew on it for a while and try your best to get in touch with the customer. If you cannot, then it is in your best interest to reject the order. Now the limitation of the AVS system is that it only works in America with American orders. There is no system in place, as of yet, for accepting International orders. As the attorney I interviewed in my ebook says, "You accept International credit card orders at your own risk."

There are a few hotspot countries you would be best to avoid unless you have an established relationship with your client. Let me preface this by saying, I draw this conclusion from my own personal experience and the feedback I get from my merchants, so take it for what it is worth. This is not gospel! The countries are; any country that was part of the former Soviet Union, and Malaysia. They seem to have a larger than average amount of fraudulent orders placed from there.

Now for my most controversial comment, never accept an order placed with a FREE email address! I have been laughed at and scoffed at over this comment simply because there are so many honest people who use free email and this means losing orders. Simply put, you are correct. You will lose orders and sales and maybe even money if you follow this rule. However, I don't think you will lose as much as you would if you accepted orders from free email addresses though. I know one merchant doing $45,000+ in credit card orders per month from the Internet that was following this rule. Then one day, he decided to throw the rule out and increase sales, as a result he almost lost his merchant account due to excessive chargebacks. Take it for what it is worth. Statistics show that more then 50% of orders placed from a free email address will be fraudulent.

There is more to a chargeback than meets the eye. Not only does a merchant lose the actual inventory and the purchase price, but there are also chargeback fees assessed to the merchant each and every time. These fees add up because they are anywhere from $15 to $50 a pop. Consult your merchant account provider if you do not know what fees you can be hit with. That is not all. Merchants who have excessive chargebacks, this is again defined by the provider, range from ½% to 2 ½%; a merchant can lose their merchant account. That is, get terminated without warning and could end up on the MasterCard Match List, a.k.a. Terminated Merchant File, which is looked at by other providers and if you show up on it, this means you will not get a merchant account. You can expect to stay on the list for 5 years too. There are new rules and regulations that have cropped up with the card associations. Visa has an International Fine for excessive International chargebacks and MasterCard has a fine for excessive chargebacks for high volume merchants. These fines are in the several $1,000's to over $100,000.