Everyone involved in a given credit card transaction from you, the business owner, the banks, and the credit card processor are all exposed to unique risks when processing credit card transactions.
By understanding where you're exposed to risk, you can better protect your business and your bottom line.
As a merchant, you want to ensure that the credit card transactions that you process are for legitimate purchases and that they are not associated with any fraudulent activity. There are several different types of credit card fraud that you should be aware of. By understanding the different types of credit card fraud that might occur, you'll be better equipped to know what to look for while processing transactions and protect your business.
Stolen Credit Cards
If you're processing credit card transactions, it's in your best interest to minimize the likelihood that someone is able to use a stolen credit card to make a purchase from your business. If you inadvertently process a transaction using a stolen credit card, then your business is at risk of a chargeback when the legitimate owner realizes that their credit card is being used without their knowledge. To help prevent the use of stolen credit cards you can use address verification or ask for the CVV (for card-not-present transactions), request photo identification, or check the signature panel to ensure that the person using the credit card is the actual owner.
If a transaction is processed for 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 a customer notices a charge on their credit card statement that they do not recognize, or they don't receive a product they order, and this prompts them to file a chargeback, this would be considered friendly fraud. Customers who commit friendly fraud do not usually have any malicious intent, they are simply confused about the proper channels to use or are forgetful about their purchasing habits. For these reasons, they are generally not considered to be a threat to your business. Learn more about why friendly fraud occurs in our article on What is Friendly Fraud?
A dispute occurs when a cardholder questions a payment made on their card with their card issuing bank. When a dispute occurs, your business will be charged a dispute fee, and the payment will be reversed. You will be able to respond to the dispute by submitting evidence to the card issuer demonstrating that the transaction was legitimate and that the customer agreed to the purchase. If the card brand sides with your business then the fee and the transaction amount will be returned to your account, but if the card brand sides with the consumer then the payment will remain refunded to the cardholder.
The card issuer might open a dispute if the transaction seems suspicious to the card brand, or if the transaction was not authorized because the cardholder's account is in collections and you did not obtain authorization to process the transaction.
By being aware of the different types of credit card fraud that can occur you can take additional steps to verify the customer's information prior to processing transactions and better identify when a transaction might be fraudulent. This will help protect your business from costly chargebacks and potential disputes.