Free Options for Merchants Fighting Credit Card Fraud

Fraudulent online transactions often result in chargebacks for online merchants. A chargeback is when a credit card hold disputes a charge that appears on their credit card statement. Most merchant account providers charge the merchant to investigate chargebacks, regardless of the outcome. Merchants lose both the merchandise involved in the fraudulent transaction and the cost to ship the merchandise if the transaction is deemed fraudulent. Just one fraud related chargeback can cost merchants as much as the profit from one day of sales.

Merchants who have a high percentage of chargeback requests will eventually lose their merchant account. Merchants who lose their merchant account have a difficult time obtaining another merchant account. A small percentage of chargebacks, as low as one percent, is enough for some merchants to lose their ability to accept credit cards. Small online businesses are especially hard hit by the percentage criteria as they have fewer sales.

Most merchants already uses an address verification system and store and transmit their customers financial information in a secure manner. Yet credit card fraud continues to plague online merchants. There are simple, manual methods that smaller online merchants can use to help prevent credit card fraud and related chargebacks. These methods are free and require only vigilance and common sense.

Many smaller online businesses cannot afford sophisticated fraud prevention software, but they have one very important advantage. An owner of a small ecommerce site usually processes all orders themselves. This gives the owner the chance to review all transactions and spot red flags that fraud prevention software can miss.

Typically, a person who has stolen credit card information will "test the card" on an ecommerce website by placing a small order. Web site owners should be suspicious of a customer who places a small order, them immediately cancels the order. This canceled order will typically be replaced by a much larger order now that the thief knows the address they have attached to the credit card is valid. These types of transactions should be an immediate red flag. The typical customer buying a $1.99 adapter doesn't decide to cancel the order and order a new stereo system instead.

Small business owners know their products better than anyone. Orders of unrelated or incompatible products should always raise a red flag. For example, an order for six pair of brand name sneakers in different sizes should raise a red flag.

A different shipping address should always be a red flag as well. The person placing the fraudulent order may know the correct billing address but they will request a different shipping address. These fraudulent transactions can be avoided by shipping only to the billing address on the credit card. Many merchants feel that this will reduce orders that are intended as gifts. This can be avoided by placing a blurb on your website about how this new policy is for the customer's protection. Most people placing online orders for gifts plan ahead and have the order shipped to themselves so they can wrap it and re-ship the merchandise to the gift recipient after removing the invoice.

Fraudulent online orders are often accompanied by requests for expedited shipping. Thieves are willing to pay very high shipping charges for next day delivery as they want the transaction completed as quickly as possible. They have a small window to order and receive as much merchandise as possible before the legitimate credit card holder realizes what is happening and cancels the card. Many merchants have simply stopped offering next day shipping or require the customer be available by phone to verify their information before processing such orders.

Conventional wisdom tells us that customers using a free email account may be committing fraud. Using a free email account by itself is not an indication of fraud but if the free email account is combined with other fraud indicators, it should raise a red flag.

If an order seems suspicious, every available method needs to be utilized to verify the order before processing. If possible, check the location of the IP address against the location of the customer's credit card. Use online telephone and address data to verify the customer's information. Call the customer to verify any questionable information. If your gut tells you this is fraud, cancel the sale.

No online merchant wants to lose a customer by appearing to question a customer's information. Legitimate customers can be asked to verify their information tactfully, in a way that stresses a companies concern with their customer's online security. Small merchants need to scrutinize every transaction for red flags, since the merchant stands to lose all the costs of the sale plus being charged chargeback fees.