Chip cards have reduced fraud in stores, but online fraud is increasing and putting merchants at risk.
Chip cards have reduced fraud in stores, but online fraud is increasing and putting merchants at risk.

Credit card fraud can be costly to companies, but there are methods business owners can employ to limit their losses. It’s not a new problem, but most of the fraud now occurs in the e-commerce realm, rather than at the checkout counter.

While so-called “chip cards” have mostly thwarted fraud in stores, identity theft and stolen card information have led to increasing online fraud. Chip cards are effective because they use a computer chip that creates a transaction code that cannot be reused. Chip cards, or EMV cards — the name came from Europay, MasterCard and Visa, the companies that originated the card — have greatly reduced fraud in stores but “card not present” fraud is rising, and is expected to reach more than $6 billion by 2018.

Merchants with a chip-enabled card reader are not responsible for fraud loss in card-present sales, but are responsible for fraudulent online sales.

“This is big business,” said Jonathan Liebert, CEO and executive director of the Better Business Bureau of Southern Colorado. “A lot of this takes place outside the United States.”

Monica Eaton-Cardone is the chief operating officer of Chargebacks911, a company that helps businesses recover revenue lost due to fraud. A chargeback is the method consumers use to dispute a credit card transaction and secure a refund for that purchase. She said chargebacks affect all business owners.

“It affects every business from a mom and pop to Walmart,” she said. “For every $100 in chargebacks, a merchant pays $316, because of the cost of the product, acquisition cost, the fee attached to a chargeback, possible loss of the product and possible fines” if monthly chargeback rates exceed a predetermined threshold.

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What can businesses do to stop credit card fraud?

“Think of fraud prevention like a net; the finer the mesh, the fewer successful fraud attempts will get through,” Eaton-Cardone said. “By building a multilayered response to fraud, merchants create additional barriers for each attack to contend with. As long as those tools are deployed effectively, multilayered fraud solutions can intercept fraud without significantly increasing transaction friction for legitimate customers.”

That means asking for the three-digit Card Verification Value number on the back of the card, as well as the card expiration date and address verification.

“Business owners need to be educated, and they need to be vigilant,” Liebert said. “They have to take steps to prevent fraud, and be consistent in their approach.”

“Merchants should also use fraud filters with a complex and dynamic rule system to separate fraudulent transactions from legitimate ones,” Eaton-Cardone said. “Shipping confirmation can also be a good idea, as that can serve as compelling evidence if the customer later decides to file a chargeback.”

Credit card “testing” is often a precursor to a big purchase, she said, when a small purchase is made to see if the perpetrator will be caught.

“Card testing is difficult to manage because the transactions tend to be just a few dollars here and there,” she said. “These add up, though, especially when cardholders request chargebacks. The fees associated with chargebacks are static, and they are all weighted evenly in determining the merchant’s chargeback-to-transaction ratio. If you see multiple transactions coming in at a high velocity from the same IP address, that’s a clear sign of card testing.”

Limiting losses

Tom Grant is senior vice president and director of retail banking at Peoples Bank in Colorado Springs. He said there is no way for a business to totally avoid card fraud unless it doesn’t accept cards.

“That, however, has other consequences including risking the loss of sales from those consumers that want to use their cards for purchases,” Grant said in an email. “Card fraud is a serious problem that affects businesses and merchants of all sizes costing, not only money, but time dealing with the fraud. There are ways to minimize the risk of falling victim to card fraud. … Counterfeit mag stripe cards account for a large percentage of today’s card fraud. When merchants convert their card machines to accept EMV cards the use of counterfeit fraud is reduced.”

Eaton-Cardone said that banks do “a fantastic job” of stopping fraud. Consumers can also avoid a chargeback situation by contacting the merchant before demanding that the bank or card issuer recovers their money from the merchant. A simple refund is often the best solution.

Grant said Peoples Bank has “a card department made up of individuals that are well educated in card processing and card fraud. We use a third-party resource that analyzes card transaction data to locate any potential threat of fraud. Using data analytics helps find patterns that can block fraudulent transactions before they are processed.

“Peoples Bank’s third-party fraud prevention solution uses data analytics to identify potential card fraud at the time of purchase. This uses the knowledge from millions of transactions to identify those that appear unusual, such as a purchase with a card at a merchant that is out of area of the cardholder or a large purchase that is unusual for the cardholder. An example would be a large purchase at a merchant in Mexico when the cardholder used their card the same day in Colorado.”

Businesses also have methods to protect themselves, Grant said.

“There are some legitimate cardholders that commit ‘friendly fraud,’” he said. “This is where the cardholder makes a purchase and then disputes the purchase attempting to obtain the merchandise for free. Merchants have protection here and can deny these disputes by following dispute processes.”

Liebert said that 69 percent of Americans were expected to shop during the recently completed Thanksgiving weekend — which included Black Friday, Small Business Saturday and Cyber Monday.

“Scammers are ready, and this is the Super Bowl season for them,” he said. “The holiday season, all through the end of the year, is an important time from a business standpoint. And it’s important to be aware of scammers who have been fishing for people’s information all year to take advantage of it now.”

There are other scams businesses should be aware of, Liebert noted.

“Businesses need to be aware of skimmers,” Liebert said. “That’s technology designed to steal credit card information, and gas pumps are notorious for this. They’re found in Colorado Springs every so often. Businesses should also check IDs when they’re scanning credit cards. It’s important to verify the information in the store.”

Eaton-Cardone recommends merchants adopt mobile wallet technologies like Apple Pay or Samsung Pay, as they can be effective at deterring fraud.

“These tools employ biometric verification as part of a two-factor authentication system; customers must first unlock the device, then use a biometric scan to authorize payment,” she said. “Biometrics aren’t foolproof, but they make fraud much more difficult to pull off.

“I’d also say that if a sale or transaction looks suspicious, the business should reach out to the customer to verify the purchase.”