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Overpayment Scam Tactics and How to Avoid Them

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Chris Reid | October 1, 2021

“There's been a recent resurgence of the popular overpayment scam. The con involves fraudsters paying with a stolen credit card. (Updated 2023).”
7 min read
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    We've noticed a recent resurgence of the overpayment scam, and if your business advertises its products or services online and accepts credit card processing, you could be a target.

    In Canada, just this year alone there have been over 47,803 victims of fraud, with a total of $420.8 M lost to scams. In the U.S, Businesses can expect to lose an average of 5% of their total revenue in 2022 to fraud with nearly half of those businesses being private and small businesses, according to the Association of Certified Fraud Examiners report.

    Prortect your business from overpayment scams by knowing and recognizing the signs, plus following the tips outlined in this blog for safe security practices.

    What Is An Overpayment Scam?

    Also referred to as a cash forwarding, or cash advance scam, this con involves fraudsters paying for a purchase with a stolen credit card, then requesting that you either forward some of the funds to another third-party or refund the purchase to a different form of payment.

    How Does It Work?

    Fraudsters will contact a business, usually via text or email, and inquire about making a large purchase (e.g. for an event). The large purchase is designed to entice the business to overlook any potential red flags so the fraudster can pay using a stolen credit card. After the business processes the transaction, the fraudster will call claiming that whatever they had planned has been canceled and ask for a full or partial refund.

    The key to this scam is fraudsters asking to have refunds sent to a different credit card or issued as a check. Because the original purchase was paid for with a stolen card, a chargeback will likely be filed leaving the business out of pocket for the refunded money sent to the fraudster, as well as the money they will have to pay back to the owner of the stolen credit card by way of a chargeback. It's a win-win for fraudsters, but a lose-lose for business owners.

    These types of scams often use online classified services like Thumbtack or Kijiji to target smaller service-based businesses including event planners, contractors, and dance instructors who they hope will be excited by the prospect of a big payment.

    Scam Tactics

    Fraudsters in these cases will often rely on fabricated emotional stories that appeal to your human empathy, so you are more inclined to compromise your usual business practices.

    A common excuse fraudsters fall back on is being in the hospital but urgently needing assistance to pay for a service. For example, if you owned a landscaping company, they might say they are in the hospital, but their home is up for sale, and they need to have some landscaping completed or risk losing out on an offer. If your services cost $1,000, they might say they will send $3,000, then ask that you forward the extra $2,000 to another service provider also working on the house but who doesn't accept credit cards.

    Claiming they are stuck in the hospital gives them a reason why they are unable to pay the other company themselves and why they cannot meet you in-person. They will use a stolen credit card for the initial $3,000 payment and the $2,000 you forward back will go directly into the scammer's bank account. Again, business owners lose on refunding the fraudster, as well as in the form of a chargeback to the stolen card owner.

    Overpayment Scams vs. Refund Scam?

    The overpayment scam is synonymous with the refund scam. At most, they are variations on a theme whereby fraudsters employ the simple tactics of using stolen credit cards to have funds funnelled to their personal credit cards or bank accounts.

    Where To Report Overpayment Fraud

    If you or someone you know is or was the victim of an overpayment scam (or another type of scam) you should report it to your local government authority or police department. Reporting fraud helps local authorities identify trends in order to track down and prosecute scammers. In Canada, you can report fraud to the Canadian Anti-Fraud Centre (CAFC), and in the US, report a scam to your State Consumer Protection Office.

    Best Practices to Avoid Being Scammed

    1. Be Wary of Customers Who Offer to Pay More Than You're Asking

    Customers typically want to pay less, so if a customer is offering to send more money than you're asking for, it should be considered a red flag.

    2. Never Forward Money to a Third-Party

    If a customer asks you to forward part of their payment to a third-party because they overpaid for a purchase, it's best to decline the whole transaction and refund the money directly to the customer using the same payment method and details as the original transaction.

    3. Refuse Any Overpayments You Receive

    Only process credit card payments for the correct purchase amount. If a customer makes the payment using a check, only deposit it if it's for the correct amount.

    4. Only Refund Purchases onto the Original Card Used

    Sometimes a scammer will use a stolen credit card for the original purchase and then presents an alternative method for the refund. To avoid giving back funds to the wrong person in a potential identity theft situation or triangulation scam, insist on returning money to the original card.

    Often scammers will use a stolen card and pocket the refund, while merchants get stuck forking up a chargeback to the original cardholder who's card was stolen AND have already paid out a refund to the thief as well.

    So, if a customer pays for a purchase using a credit card, the refund should only be returned to the original card used for the transaction. In fact, the card brands dictate that, despite some rare exceptions, no cash refunds should be given for a credit card purchase and any refunds given for credit transactions must be refunded to the same card that was used for the original purchase. This protects cardholders and you from paying out double.

    5. Confirm the Customer's Information

    Before you proceed with a payment it is good payment security practice to confirm the customer's name, payment information, phone number, and billing address. One of the best practices against overpayment scams is to use an address verification service (AVS).) to confirm that the address given during the checkout process matches the address on file for the credit card with their local bank. If the address and phone number are from different areas, or if they don't match the payment information, you can request additional information from their local branch or calling the bank's phone number of the issuing bank to confirm the order. Ask your payment processor about fraud defense tools like the Helcim Fraud Defender which automatically spot red flags with customer information for you.

    At any point, if the purchase seems to be a legitimate buyer and you don't feel right, or you can't confirm their information, you can choose to refuse to accept payment from the buyer and decline the transaction immediately altogether.

    6. Don't Rush Through a Large Purchase

    Train your cashiers to look for these signs, and give them assurance to take their time and trust their gut. That way they won't overlook red flags or rush through processing a payment just because a purchase is significantly larger than your usual transactions.

    7. Don't Switch Payment Processors or Sign Up for a New Service to Make a Sale

    If a customer asks you to use a specific payment provider or service to process their payment, it is most likely an indication that they are trying to do something fraudulent and they've identified a certain service or processor that they are able to exploit.

    8. Be Wary of Customers Offering to Pay Your Transactions Fees

    A customer who seems overly knowledgeable about credit card processing or who offers to pay transaction fees for you should be a big red flag. There is no reason for a customer to offer to pay the credit card processing fees.

    Final Thoughts

    Stay on the lookout for the warning signs listed above; knowing how to identify potentially troublesome transactions can help you spot overpayment scams and red flags faster, saving your business time and money. When in doubt, it's best to fall back to the general rule that if a purchase or transaction seems too good to be true, it probably is. Now, any time someone tries to overpay your business, you'll now see this scam tactic for what it truly is and be able to stop it in its tracks.

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