Tips for Preventing Credit Card Fraud and Avoiding Chargebacks

Protect your franchise and your bottom line in card-present and card-not-present transactions.

By Kevin Kobs

Today’s shoppers expect to be able to pay with credit cards wherever they shop, whether in person or online, in the field or by phone. It’s a fact of life that businesses that accept payment cards are more competitive and can potentially realize increased revenue from the new customers they attract.

Sadly, credit card fraud is another fact of life, but one that can be addressed and protected against. Credit card fraud is defined as the unauthorized use of cards or card account numbers for financial gain, often by using them to purchase goods and services.

According to the 2013 Federal Reserve Payments Study, the estimated annual number of unauthorized transactions (third-party fraud) in 2012 was 31.1 million, with a value of $6.1 billion. Among signature debit and credit card payments in 2012, card-not-present fraud rates were estimated to be more than three times as high as card-present fraud rates.

What can you do to help keep credit card transactions at your franchise business as secure as possible and save money by reducing the potential for fraudulent activity and costly chargebacks? Here are some tips.

Card-Present Transactions

It’s easier to identify some of the behaviors associated with credit card fraud when both the cardholder and the card are physically at the point of sale. Some examples of suspicious behavior that you should watch for include customers who:

• Purchase of multiples of the same type of merchandise or very expensive merchandise, especially if they don’t ask any questions about the items,

• Purchase a wide selection of the same merchandise without regard to size, color or price,

• Leave the store after making a purchase only to return later to make additional purchases,

• Try to distract or rush you during the transaction, especially if they’re accompanied by others, and,

• Time their purchases for when the store is opening or closing for the day.

Additionally, you can help protect your business from becoming a victim of credit card fraud by adopting the following strategies:

• Never accept an expired credit card or one that appears to have been altered.

• Look for built-in security features and make sure they are intact. Embossing on the card should be clear and straight, the account number on the front of the card must match the one printed on the back, the hologram should be three dimensional and smooth with the card surface, and the signature panel should be unblemished.

•   If the card is not signed, have the customer sign the card in your presence and check the signature against the customer’s picture ID.

•   When you process the card, verify that the account number on the terminal matches the account number on the card. Compare the name printed on the electronic sales receipt to the name embossed on the card, and the signature on the sales draft with the signature on the back of the card. No match, no sale.

•   If you receive a “call center” or “pick up card” message through your terminal, call the authorization center and follow their instructions.

Pay attention to any messages from the card authorization center. If you receive a “do not honor” or “decline” message through your terminal, do not proceed with the transaction. Even if you run the transaction again and receive an approval code, there is no protection for a transaction after you have received a “decline” or “do not honor” message.

If a sale seems suspicious, call the authorization center and ask for a Code 10 authorization. This is a universal code that alerts the center that you have concerns about a transaction. The Code 10 operator will ask you a series of “yes” or “no” questions to help determine if it is a fraudulent transaction. Follow the operator’s instructions.

Card-Not-Present Transactions

If your franchise deals in card-not-present transactions, such as Internet orders or mail order/telephone order, recognizing fraud can be trickier because neither the customer nor the credit card is physically present.

Fraudsters use lost, stolen or fabricated credit cards or account numbers to steal products and services in CNP situations. When the actual cardholder receives the statement with the fraudulent charge and disputes it, a chargeback is initiated. Until it is settled, the amount of the sale is deducted from the business’ merchant account and a chargeback fee is added. Without a credit card imprint receipt or customer signature to confirm the transaction, it’s very difficult for you to win a disputed charge, so you’re out the merchandise or service you provided, the amount of the sale and the chargeback fee.

To help lessen your chances of being victimized by a fraudulent CNP transaction, always require the cardholder’s credit card number, validation code and expiration date; the name that appears on the front of the credit card; the cardholder’s billing address and phone number; and a description of the merchandise or services rendered.

Additionally, be alert for incoming orders that:

• Are larger than normal for your business, especially when you don’t know the customer,

• Include several of the same item or very expensive items,

• Request “rush” or “overnight” shipment,

• Ship to the same address but were purchased on different cards,

• Charge transactions to account numbers that are sequential,

• Provide multiple card numbers from a single Internet address,

• Charge multiple transactions to one card over a very short period of time, or,

• Ship to an international address, since they cannot be verified by an Address Verification Service.

AVS is an important service offered by your merchant account provider that compares the shipping address provided to the merchant with the cardholder’s billing address that’s on file with the issuing bank. If the two do not match, do not ship the merchandise. Ship merchandise only to the cardholder’s billing address, and consider requiring a certified signature as proof that the merchandise was delivered.

Finally, share what you have learned with your employees. Train them in the right ways to handle card-present and card-not-present transactions as a first line of defense against fraudsters.

Preventing credit card fraud is the responsibility of every party involved in an electronic payment transaction — merchants, issuing banks and merchant services providers — and chargeback prevention is critical to the bottom line of all businesses. These tips will be helpful in addressing both.

Kevin Kobs is vice president of business development at TransFirst. Find him at fransocial.franchise.org.