8 Credit Card Fraud Detection Steps to Take in Your Business

8 Credit Card Fraud Detection Steps to Take in Your Business

Day-to-day transactions are becoming less reliant on cash and more on credit cards. 2016 total non-cash transactions increased 10.1% from the previous year.

While this means consumers can spend more money, this also opens them up to the risks of credit card fraud. And merchants share those risks.

U.S. merchants are most at risk, the country hosting for nearly half of the world’s credit card fraud. And it’s even worse for small businesses with fewer than 100 employees — they lose twice as much per incident.

Luckily, there are ways to mitigate credit card fraud in your business. Below, we’ll go over credit card fraud detection techniques and tools you can implement in your biz.


46% Of The World'S Credit Card Fraud Happens In The United States

What is credit card fraud detection?

Credit card fraud detection is when a business takes steps to prevent stolen money, products, or services obtained via an illegitimate credit card transaction. Credit card fraud can happen both by the cardholder themselves or by someone else. There are many ways a business can detect credit card fraud, which we’ll go over in a bit.

Why fraud detection is important

In 2018 alone, there were more than 200,000 breached credit card accounts. How much does credit card fraud cost businesses? In 2018, merchants lost $2.94 in revenue for every $1 in fraud.

Card-not-present (CNP) fraud has proven to be the most prevalent and costly: The average CNP transaction in the U.S. was $403 in Q1 2019.

And according to the NRF, fraud is the top payment-related challenge retailers have in their business.

In short: Credit card fraud is rampant, expensive, and harmful to your bottom line.

Credit Card Fraud Statistics
  • How can merchants spot and prevent credit card fraud?

    We know this sounds like scary stuff, but you can take matters into your own hands. Merchants who take steps to prevent and detect credit card fraud will protect more of their assets. Here are some tips:

    1. Watch for suspicious behavior

    If you have face-to-face interactions with your customers, sometimes it’s as simple as observing their behavior. At a certain point in your business, you get a general feel for how people engage with your space. You know how long they spend, traffic patterns, how they choose which products to purchase, etc.

    Anyone who deviates from the norm isn’t necessarily a fraudster, but it can be the first red flag to watch for.

    Other suspicious signs? Someone who looks nervous or anxious, sweaty palms, unsure of themselves, jittery. Lots of conversation during the transaction.

    2. Examine the credit card

    Whether or not a customer is displaying suspicious behavior, you always want to double check the credit card. Ask for photo identification and make sure it matches the name on the card.

    Use a fraud detection system like an Address Verification Service (AVS) to mitigate fraud. Merchant services providers provide AVS tools to merchants to verify cardholder identity. Essentially, customers enter their billing address, and the system cross checks it with the address on file with the issuing bank. If there’s a mismatch, the transaction won’t go through.

    Other physical indicators to look for on the credit card include a weird size or shape, misshapen letters, damage, and anything that generally looks abnormal or out of place.

    3. Know what the high-risk transactions are

    Some purchases are more likely to be fraudulent transactions than others. Here are a few examples of what to look out for:

    • Electronics
    • Jewelry
    • High-ticket or luxury items
    • Gift cards
    • Digital goods

    4. Provide great customer service

    Sometimes, credit card fraud is done by the cardholder themselves. This is known as friendly fraud, which is when a customer contacts their bank for a refund for a charge from a merchant for a legitimate transaction. This may happen both intentionally and unintentionally.

    If you offer proactive, quality customer service, customers are more likely to contact you directly with issues (helping to mitigate chargebacks). They’ll also see that your staff is paying attention to the sales floor, which could mitigate intentional external theft.

    5. Call the credit card issuer

    If you really feel uneasy about a transaction, give the credit card company or financial institution a call. We refer to this in the industry as a Code 10.

    Essentially, a Code 10 authorization will take you through a series of yes or no questions while on the phone. These questions help to verify the cardholder’s identity — and the customer never has to know your suspicions, because you’ll only be saying “yes” or “no”. The operator will then advise you if the transaction is approved, or what to do if it isn’t.

    6. Educate yourself on the types of fraud

    One of the first steps to detecting fraudulent activity is to keep abreast with the latest on credit card fraud. You need to know what you’re up against. In retail and eCommerce, the most common activities involving fraudulent credit card transactions include:

    Lost or stolen credit cards. People can get away with fraudulent charges and unauthorized transactions by using a stolen credit card before the original card owner has had the chance to report it.

    Chargeback fraud / friendly fraud. Chargeback fraud occurs when the shopper files a chargeback on a legitimate transaction. This type of fraud isn’t always intentional. There are cases when the consumer doesn’t recognize the charge on their statement, so they call their credit card company to dispute it.

    Counterfeit cards. This is when a fraudster creates a fake card using someone else’s credit card details. Usually, fake cards are produced by skimming a real card through a  magnetic swipe device and then using the stolen information to come up with a new card.

    Card testing fraud. A common type of fraud in eCommerce, card testing fraud occurs when fraudsters “test” stolen credit card information using a merchant’s online store. They do this by making small purchases on a website to determine the validity of a credit card. If a purchase goes through, they’ll know that a card is valid, and they can use it to make larger purchases.

    7. Train staff on fraud detection techniques

    While it’s great to know all of the above as a business owner, you need to empower your employees with the same knowledge. You also want to ensure your staff isn’t accusatory when performing fraud detection steps in front of customers.

    8. Upgrade your software and hardware

    When it comes to your payment processing technology, it’s absolutely critical to use tools with strong anti-fraud features. Look for PCI compliance, which is a set of industry standards that ensure companies process or transmit customer payment information in a secure way.

    As far as your card readers go, use an EMV chip reader. These are known to be more secure than the traditional swipe reader. Swipe readers are vulnerable to credit card skimming, which is when a fraudster swipes a card that can hack into the system and export all of the information for the credit cards that have been swiped using that same reader.

    Credit card fraud detection tools

    There are many credit card fraud detection techniques and technologies. The most effective credit card fraud detection happens with a multi-pronged approach, using a combination of strategies. Some of those technologies include:

    • CVV verification: This is the short (often three or four digits) card security code found on the credit card. It’s an added layer of credit card verification — it’s easier to steal just the credit card number than both the credit card number and CVV code.
    • AVS: Defined above, Address Verification Service compares the address associated with the card and the customer-provided address.
    • Fraud scoring: A data-driven analysis of the likelihood of fraud for different transaction characteristics, including IP address, shipment method, AVS code, and more.
    • Machine learning and artificial intelligence: Fraud scoring is one type of machine learning. There are hundreds of other algorithms and AI-driven ways to analyze likelihood of credit card fraud. These technologies are employed in different software.
    • Geolocation: Matches credit card location to the location of the customer’s IP address, smartphone, or even home address.
    • Velocity limits: This prevents excessive back-to-back transactions or credit card activity.

    Here are some examples of credit card fraud detection software worth checking out:

    Moving forward with fraud prevention in your business

    Fraud is a multi-pronged issue that merchants face every day. There is no one-size-fits-all solution to eliminating credit card fraud in your business.

    For more information on fraud-proofing your biz, check out:

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FAQs About Credit Card Fraud Detection

Q: What is credit card fraud detection?

Credit card fraud detection refers to the process of identifying and preventing fraudulent transactions made using stolen or unauthorized credit card information. It involves employing various tools, technologies, and strategies to detect suspicious activity, patterns, or anomalies that may indicate fraudulent behavior.

Q: How does credit card fraud detection work?

Credit card fraud detection works by analyzing transaction data and patterns to identify potential fraudulent activity. It typically involves monitoring for indicators such as unusual purchase amounts, multiple transactions within a short time period, transactions from high-risk regions, or mismatched billing and shipping addresses. Advanced fraud detection systems may utilize machine learning algorithms and artificial intelligence to continuously learn from new patterns and adapt to evolving fraud techniques.

Q: What should I do if I suspect credit card fraud in my business?

If you suspect credit card fraud in your business, it is important to act swiftly. Immediately stop any ongoing fraudulent transactions if possible. Contact your payment processor or acquiring bank to report the suspected fraud and seek guidance on the next steps. Preserve any relevant transaction records or evidence that can assist in the investigation. Cooperate with law enforcement agencies and provide them with any requested information. Notify affected customers and work with them to resolve any unauthorized charges or issues related to the fraud.

Q: Can I be held liable for credit card fraud in my business?

As a business owner, you can be held liable for credit card fraud if you fail to take reasonable measures to prevent fraud or if you are found to be involved in fraudulent activities. It is essential to adhere to industry security standards, implement robust fraud prevention measures, and stay updated with compliance requirements. By doing so, you can minimize the risk of liability and demonstrate that you have taken the necessary steps to protect your customers’ payment information.

Q: Should I use fraud prevention tools provided by my payment processor?

Using fraud prevention tools provided by your payment processor can be beneficial in enhancing your overall fraud detection and prevention efforts. These tools are often designed specifically for the payment processing industry and can leverage advanced technologies and data analysis techniques. However, it is crucial to evaluate the effectiveness of these tools, their compatibility with your business needs, and any associated costs before making a decision. Consider conducting a thorough assessment to determine what fraud prevention tools are best for your business.

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