Balancing Fraud and the Flow of Commerce
If your business accepts credit cards, fighting fraud while also allowing legitimate transactions to flow seamlessly is an ongoing balancing act. Card networks want to encourage consumers to use their credit cards, but they don't want the cards to end up in the wrong hands or to be used by someone who is not the card's rightful owner.
Banks want to make it easy for people to access their money seamlessly whenever they need it and wherever they are, but they don't want to make it so easy that someone other than the account owner would be able to gain access to the funds.
As a business owner you will also want to make it easy for customers to make purchases using their preferred payment method, but because of the risks associated with fraudulent transactions and chargebacks that we mentioned in the previous section, you don't want to make it so easy that your transactions end up being disputed and you lose income to chargebacks.
Here is an example of this balancing act. An ecommerce store wants to require their customers to provide photo-ID before making an online purchase, as a way to reduce fraudulent orders, but this added friction would likely increase their shopping cart abandonment rates and result in less revenue. This highlights that balancing risk while encouraging business is an ongoing challenge in the world of commerce and it is ever evolving.
It is possible for merchants to commit fraud. Payment processors ask for business information and details when setting up merchant accounts for applicants to reduce their risk of being exposed to fraud. Processors are at risk for fraudsters who sign up for merchant accounts with no intention of operating legitimate businesses. In these cases, the accounts are sometimes used to process as many fraudulent transactions as possible in a small period of time before the processor catches on and closes the account. To reduce the risks of these types of fraudulent accounts, processors may hold funds when a new merchant begins processing with them, or they may request additional details if there is a high-value transaction or processing activity that is outside the normal activities of a certain account or industry.
Some merchants also resort to identity theft to sign up for merchant accounts because they might not be able to qualify for one themselves. Or, if their business is considered high risk or illegitimate, in order to get their business approved, they might fabricate important details like what they are selling or what the core function of their business is.
Fraud and Other Risks Merchants Face
There are several different types of credit card fraud and risks that you should be aware of as a merchant. By making sure you understand the different types of risk that you might face, you'll be better equipped to know what to look for while processing transactions in order to protect your business.
Stolen Credit Cards
As a merchant accepting credit cards, you will want to minimize the likelihood that someone is able to use a stolen credit card to make a purchase from your business. If you process a transaction using a stolen credit card, then you're opening your business to the risk of a chargeback when the legitimate cardholder realizes that their card has been stolen and used for a purchase that they did not authorize. Using address verification (AVS), asking for the CVV for card-not-present transactions, requesting photo identification, or enforcing chipcard acceptance are all ways you can help minimize the risk that someone is using a stolen credit card.
If a customer notices a charge on their credit card statement that they do not recognize, if they don't receive a product or service they order, or if the product or service they receive is defective or unsatisfactory, they can dispute the transaction and file a chargeback. In many cases, the customer may have unknowingly agreed to a recurring billing cycle, or they may have been genuinely confused about what they were purchasing. This would be considered friendly fraud, and even though it might not be intentional fraud, it can still harm your business as well as lead to other, more intentional forms of fraud down the line. Customers who commit friendly fraud do not usually have any malicious intent, they are often simply confused about the proper channels to use to request a refund or are forgetful about their purchasing habits. For these reasons, it is important for merchants to clearly identify their business name on credit card statements to avoid merchant confusion and have clearly posted communication channels for customers to ask questions and clarify purchases.
The resulting chargebacks from friendly fraud mean that the customer's financial institution cancels the transaction, the customer gets refunded in full, and the customer generally keeps the item or service they ordered. As the business owner, this means that you've now lost out on a sale, are out product or hours, and must incur the chargeback fee issued by the card brand.
Chargeback fraud is often confused with friendly fraud, because the chargebacks filed are often for the very same reasons, but chargeback fraud is when a customer is knowingly exploiting consumer protections to their benefit. In these cases, a customer would initiate a chargeback after making a purchase using their own credit card even after receiving the item or service. Taking measures to protect your business from friendly fraud also protects you from chargeback fraud, so it's a good idea to take the necessary precautions.
An authorization error may occur if you do not have approval from the issuing bank to process a transaction. You may also get this error if you process the same transaction multiple times in error, or if you process a transaction without approval, or with an approval code that is invalid.
Customer Dispute / Chargeback
A dispute occurs when a cardholder questions a payment made on their card with their card issuing bank and can sometimes lead to a chargeback. When a dispute occurs, you will be charged a chargeback fee, and the payment will be reversed. You will be able to respond to the dispute by submitting evidence to the card issuer to demonstrate that the transaction was legitimate and that the customer agreed to the purchase. If the card brand sides with your business then the transaction amount will be returned to your account (though the chargeback fee is usually not), but if the card brand sides with the cardholder then the payment will remain refunded to the cardholder.
An issuer dispute can occur if the card brand is suspicious of a transaction, or if the transaction was not authorized because the cardholder account is in collections and the merchant did not obtain valid authorization to process the transaction.
Stolen Credit Card
If a transaction is processed with a credit card that has been stolen, then the original cardholder may file a dispute or a chargeback request after noticing that the unauthorized transaction was posted to their account. If the CVV, AVS, or customer details do not align with the details listed on the credit card, you can request additional details, ask for another payment method, or decline to process the transaction to help protect your business from the risk of processing a stolen credit card. If you are processing a large volume of online transactions, then you will likely want to confirm that the CVV and AVS details align with the customer shipping details.