How do Merchants Protect Themselves from Credit Card Fraud?

Merchants often suffer losses due to credit card fraud.

Credit card fraud is costly for merchants who must refund fraudulently charged transactions. LexisNexis estimates it lost almost $5 billion in 2008. This cost trickles down to consumers who pay higher prices to cover the losses. Many merchants, both in stores and online, take specific steps to protect themselves from credit card fraud. They try to catch problems before finalizing the transaction.

Definition

Merchant credit card fraud means fraud committed against businesses. Criminals use stolen credit cards in person or online to buy as much merchandise as possible before the theft is discovered. The merchant must return the money when the transaction turns out to be fraudulent, so it loses both the money and the purchased goods. The criminals either keep the merchandise or resell it cheaply to get quick money.

Time Frame

WISCO Computing explains how using real-time credit card processing cuts down significantly on fraud. The merchant finds out within seconds if the card has been reported as stolen or lost. If so, the transaction can be aborted. The merchant is much more vulnerable if he waits until after the goods are taken or shipped before processing the card and getting an approval.

Verification

Careful merchants use various methods to verify credit cards. Store clerks who handle in-person transactions can ask for photo identification and reject credit cards that are not signed on the back signature strip. WISCO computing states that online merchants can insist on entry of the "card verification value," a three or four digit number on the card. This does not totally prevent fraud, but it proves the purchaser most likely has the card in his possession. This is not foolproof because a thief can get it by seeing a card.

Location

Credit card fraud often originates in foreign countries. Go eMerchant, an ecommerce website, identifies Nigeria, Ghana, Indonesia and Malaysia as common scam origination sites. Merchants can avoid being scammed by holding foreign orders for a specified period of time before shipment. This allows for card verification and an extra period of time in which to cancel the order if the card ends up reported as lost or stolen.

Warning

Merchants cannot fully protect themselves from credit card fraud, despite taking the best precautions. There is a time lapse before a stolen or lost card is reported. Purchases made in the meantime are approved. Criminals also electronically steal credit card information in a process called "skimming," according to creditcards.com. They make fake cards that match a thief's name and identification even though they contain someone else's actual account information. There will always be some losses associated with accepting credit cards because of these issues.

References

• WISCO Computing: Merchant Credit Card Fraud
• Go eMerchant: How to Mitigate Chargebacks to Your Internet Merchant Account
• Creditcards.com: Skimming 101
• Magtek Security: Campaign to Wipe Out Conterfeit Card Fraud