Chargebacks 101: The Truth About True Fraud

In Blog Posts, EMV, Fraud by Rebekah Horton

Though accepting credit cards is hugely beneficial to businesses, it doesn’t come without risks. Those risks typically take the form of chargebacks, which are intended to protect card holders from fraud. If a customer disputes a transaction with their credit card company because they suspect fraud, merchants have to go a relatively complicated process which almost always ends in chargebacks, lost sales and fees ranging from $15- $100.

HOW DO CHARGEBACKS IMPACT MERCHANTS?

Chargebacks and fraud pose a significant threat to businesses because in most instances, the merchant is held completely responsible if fraud occurs. Basically, if a customer disputes a transaction with their credit card company, the merchant is going to lose 99% of the time. Merchants that frequently have to issue chargebacks can have their merchant account closed or may have to use high-risk payment processing. The extra expense of a high risk account usually drives a merchant out of business.

In the first two parts of our Chargebacks 101 series, we discussed the two biggest chargeback sources: friendly fraud  and fraudulent chargebacks and how to protect your business from them. This third installment of our four-part series will cover true fraud – the type of fraud that most people associate with chargebacks.

WHAT IS TRUE FRAUD?

Also known as identity theft, true fraud begins with payment acceptance from a stolen card. The fraudulent purchase is disputed by the cardholder which results in the card account being closed and a new account number and card being issued to the customer. True fraud doesn’t happen as often as fraudulent chargebacks and friendly fraud; in fact, it accounts for about 29% of fraud losses. Although it occurs less often, it can be more damaging because revenue lost to true fraud is not recoverable.  In almost every instance, the merchant will be held responsible for true fraud unless they’ve taken necessary precautions to prevent fraudulent transactions.

HOW TO PREVENT TRUE FRAUD
  • Use EMV Terminals: This is the big one. As of October 1, 2015, all US businesses are responsible for credit card fraud if they are not EMV compliant. Being EMV compliant means using POS terminals that process the credit cards with chips in them. If your business has not made the switch to EMV capable terminals, you risk taking full financial responsibility if fraud occurs. The good news is that upgrading your equipment is simple. In fact, Eliot offers many EMV solutions. If you’d like to learn more about these products, contact us here.
  • Check Customer ID: Preventing fraud at your business can be as simple as asking your customers to provide a photo ID for credit card purchases. Use photo IDs to verify the name on the credit card and make sure the photo looks like the person trying to make the purchase. If they can’t provide an ID of any kind, ask for a different payment method. If you’re worried that asking customers to provide an ID when making a credit card purchase will annoy them, don’t be. In most cases, customers will thank you for taking the extra measures to protect their information.
  • Use Address Verification Services (AVS): If you allow customers to make purchases online, make sure you’re using an address verification service. An AVS will check the billing address of the credit card provided by the user with the address on file at the credit card company. If any of the information does not match, the transaction will be rejected.

With chargebacks increasing 20% every year, merchants are more at risk than ever. Take the time to implement the necessary precautions. You’ll be thankful you did in the long-run.