10 Best Practices on Credit Card Fraud Prevention for Merchants

10 Best Practices on Credit Card Fraud Prevention for Merchants

Credit card fraud has become an increasingly serious problem both for brick-and-mortar merchants and online retailers. According to the Credit Card Fraud 2021 Annual Report, 127 million Americans have experienced card fraud on at least one occasion. This represents almost 50% of the American adult population.

The report also found that nearly 40% of cardholders do not subscribe to email alerts or texts from their issuing bank or credit card company. As such, they are unlikely to learn about any payment fraud until fraudsters have racked up substantial charges on their card.

In this article, we’ll take a look at some credit card fraud prevention best practices that merchants should adopt and also discuss the types of card fraud they are most likely to encounter.

Infographics Credit Card Fraud Prevention 1

What Is Credit Card Fraud?

The term “credit card fraud” refers to any type of unauthorized activity on a specific credit card. The card user does not own the card or have permission to use it. Credit card fraud also applies to cash advances.

Credit card fraud can involve a Visa, Mastercard, American Express, or Discover card from a US issuing bank. Thieves can also engage in payment fraud with a debit card.

Card fraud can also result from large-scale data breaches. Within the past decade, hackers have infiltrated numerous well-known retailers’ customer databases.

Online transactions fraud

eCommerce merchants often encounter card-not-present fraud. Because no credit card is provided, card authentication is more difficult. This type of fraud can be tricky to catch.

First, the scammer enters the stolen credit card numbers along with the card’s CVV code and expiration date. Then, the fraudster enters their shipping address and phone number. Without fraud detection in place, the merchant processes the order.

In-store credit card fraud  

Brick-and-mortar merchants can be affected by several types of fraudulent transactions. Business owners often have difficulty spotting fraudulent purchases.

Stolen credit card

Most credit card fraud results from a stolen credit card or a lost credit card. The fraudster typically enjoys an eCommerce shopping spree before the cardholder realizes their card is missing.

Counterfeit card

To produce a counterfeit card, a fraudster obtains cardholder information and produces a fake magnetic stripe card. The thief can easily use the card to make purchases or obtain cash advances.

Doctored or fake card

These two card transactions require the retail merchant to manually enter the credit card information. Therefore, the merchant should regard them as suspicious transactions.

A doctored card is a real credit card with a disabled magnetic stripe. When this card data has been deleted, fraudsters can revise the card details to match a valid card.

A scammer may create a fake card that doesn’t work at the store’s point of sale terminal. Therefore, the thief asks the merchant to manually enter the sale. This should trigger multiple red flags, and the merchant should suspect fraud.

Infographics Credit Card Fraud Prevention 2

Why Fraud Protection Is Important for Merchants

Each brick-and-mortar small business owner and eCommerce merchant should have card fraud protection. By engaging in fraud prevention and data security measures, the merchant is less likely to face three unpleasant outcomes.

1. Refunds from fraudulent sales

If a customer’s card was used in a fraudulent transaction, they will likely ask for a refund or account credit. This represents lost revenue for the merchant.

2. Potentially damaging chargebacks

Some customers will issue a credit card chargeback request instead of requesting a refund. A chargeback occurs when the cardholder disputes a credit card charge with the card issuer.

Some chargebacks result from actual credit card or debit card fraud. However, other customers file the chargeback request even for legitimate purchases.

Each chargeback impacts the merchant in three ways. First, they lose the transaction revenue. The merchant also loses the money they spent to purchase the item. To add insult to injury, the merchant’s credit card processor could assess a $20 to $50 chargeback fee (per incident).

Worse yet, merchants with too many chargebacks could be placed in a high-risk group. They will certainly see higher payment processing rates. In addition, the merchant’s payment processor could suspend or close their merchant account with little warning.

Infographics Credit Card Fraud Prevention 3

3. Damaged retailer-customer relationship

Customers who fell victim to credit card fraud may be dissatisfied with their store experience. The retailer can take steps to repair the relationship, such as offering a gift or purchase discount. However, this tactic is not guaranteed to work.

10 Best Practices on Credit Card Fraud Prevention for Merchants

Small businesses are at greater card fraud risk than larger companies with fraud prevention programs in place. With sustained due diligence, however, small business owners can greatly minimize their chances of payment card fraud.

eCommerce fraud detection

All eCommerce transactions are regarded as card-not-present transactions. As a result, these card transactions have a much higher fraud risk. These five strategies will help eCommerce retailers minimize the chances of online payments fraud.

1. Require card security codes  

Credit and debit cards contain three- or four-digit security codes on the card’s reverse side. These numeric sequences are known as CVV or CVC codes. Merchants should always require this code when completing a purchase. If the customer does not provide this information, the eCommerce software will decline these card transactions.

2. Utilize the address verification service

An optional address verification service (or AVS) can help merchants to complete the card validation process. The AVS verifies that the customer card’s on-file billing address matches the entered address. However, a recent customer address change can cause a mismatch and a declined transaction.

3. Look for matching credit card and IP addresses  

Every eCommerce order originates from a public Internet Protocol address (or IP address). The IP address displays the purchaser’s city or global region. If this designator does not match the credit card address, the merchant should decline the transaction.

4. Insist on a physical shipping address

eCommerce merchants should avoid shipping to a non-physical address such as a P.O. box. In addition, online retailers should decline to ship to a freight forwarder’s address. These addresses will include a container number in the address field.

5. Use tracking numbers for all shipments

Online retailers should use a tracking number for every shipment. This number ensures the package’s delivery to the designated address. This method helps to reduce claims from customers who say they never received the package.

In-store fraud detection

Brick-and-mortar merchants can use multiple tactics to reduce credit card fraud risks. First, the development of EMV chip cards reduces the chances of in-store transaction fraud. These five credit card fraud prevention tactics will also reduce card-present transaction risks.

6. Adhere to payment processing guidelines

Every merchant’s payment processor and credit card company will provide specific transaction guidelines. Merchants who do not follow these rules may have their merchant account frozen or canceled.

7. Decline all damaged cards

Merchants should beware of customers who say their card is unreadable. Fraudsters often damage the cards so the merchant will manually process their transaction. The merchant should request another form of payment or decline the transaction.

8. Insist on card security codes

Each customer must enter the three- or four-number card security code from the card’s reverse side. This sequence is known as a CVV or CVC code. The code’s correct entry shows that the card is valid. However, this matching entry does not verify the cardholder’s authorization to use the card.

9. Maintain real-time authorization capabilities

Merchants should pay for the optional real-time authorization service. This ensures that the card number is valid and there is no report of a stolen or lost card. However, this report does not say whether the customer is authorized to use this credit card or debit card.

10. Do not tolerate customer bullying

Fraudsters may try to intimidate the merchant into processing their card transaction. Merchants can decide to refuse service to that customer.

Reducing Credit Card Fraud

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Merchants can decrease their chances of credit card fraud by choosing a payment processor with robust fraud prevention measures. To ensure the safety of merchants, well-regarded Payment Depot maintains strict PCI compliance and uses added security features.

This reputable payment solutions provider also offers affordable membership-based pricing. Merchants do not pay any extra fees, and Payment Depot provides industry-leading customer service. Contact our award-winning support team today to learn more.

FAQs about Credit Card Fraud Prevention

Q: What is credit card fraud in the context of merchants?

Credit card fraud refers to any unauthorized activity that involves the use of a credit card. This could be by someone who does not own the card or has the authorized permission to use it. This kind of fraudulent activity can affect brick-and-mortar merchants and online retailers.

Q: What are some types of credit card fraud that merchants often encounter?

Fraud types that merchants frequently face include card-not-present fraud, which is especially common for eCommerce merchants, and instances arising from a stolen, lost, or counterfeit credit card. Large-scale data breaches that result in compromised customer card information also pose a significant threat.

Q: What does it mean when a credit card is doctored?

A doctored card is a legitimate credit card that has its magnetic stripe tampered with or disabled. Fraudsters delete the original card data on this stripe and revise it to match a valid card’s details. Such a card does not work at the point of sale terminal, prompting the merchant to enter the sale manually.

Q: What is a chargeback from the perspective of a merchant?

A chargeback occurs when a cardholder disputes a credit card charge with the issuing bank or credit card company. This dispute could arise from actual credit card fraud or even legitimate purchases. Merchants bear significant losses from chargebacks, including losing the transaction revenue, the money spent to purchase the item, and additionally, having to pay a chargeback fee.

Q: How can eCommerce merchants prevent credit card fraud?

eCommerce merchants can take several measures to prevent credit card fraud. These include always requiring the card’s CVV or CVC codes, employing optional address verification services (AVS), declining transactions with mismatched IP and credit card addresses, avoiding shipping to non-physical addresses, and using a tracking number for every shipment.

Q: How can brick-and-mortar merchants prevent credit card fraud?

Brick-and-mortar merchants can use various methods to reduce potential credit card fraud risks. Checking the customer’s card security code, using optional real-time authorization service, and ensuring strict adherence to the guidelines provided by the payment processor and credit card companies are some of these methods.

Q: What are some reliable solutions for secure payment processing?

Merchants can opt for payment processors that offer robust fraud prevention measures and adhere to strict PCI compliance. For instance, Payment Depot is a highly regarded solution that also offers membership-based pricing with no extra fees, making it a cost-effective and secure option.

Q: How does a card-not-present transaction increase the risk of credit card fraud for online transactions?

Card-not-present transactions inherently possess a higher fraud risk as the actual card and the cardholder aren’t physically present during the transaction. This makes authentication more difficult, and therefore, the chance of fraudulent activity is higher.

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