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The 5 best ways to spot—and thwart—credit card fraud

The following story is part of an educational series intended to help small business owners avoid credit card fraud. It is presented by Merchant Services.

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Chris Ward, a solo entrepreneur, sells electronics and housewares online, and recently received an odd request from a customer: “Please send this gift to my friend Suzy."

Ward, who lives in suburban Atlanta, immediately became suspicious. "It was a typical scam," Ward recalls. "It's one of my rules of doing business: only ship to the address on the order page. If someone wants to send an item to a different address, I tell them I'll cancel the order, and they can update it with new information."

Experts say Ward was right to be suspicious—credit card fraud has become increasingly common. In fact, a recent Federal Reserve study found that fraud accounts for more than 50 percent of the cases ofdisputes, also known as chargebacks, where a merchant's account is debited because of an improper charge.

Here's one of the unpleasant truths many merchants face: when a customer calls his bank and says a charge on his statement is fraudulent, its very challenging for businesses to dispute the claim, in part because they can't prove a signature is valid. As a result, the best defense is to invest in processes that prevent fraud in the first place.

Here are five key ways to identify and prevent fraudulent credit card use:

1. Confirm identification through customer's signature

If the card is present at the time of the sale, always compare the cardholder's signature to the signature on the back of the card. If the signature panel is blank, ask the cardholder to sign it and compare it to their identification. If the cardholder refuses, request another form of payment.

Anil Dadheech, a Morristown, New Jersey, clothing shop owner, was plagued by fraudulent card chargebacks. He realized that husbands were giving their credit cards to their wives to go shopping, and then claiming fraud when presented with the charges on their statements. The signatures didn't match.

As a result, Dadheech says he implemented a policy requiring photo ID for card purchases over $100 to check that the name on the card matches the ID. "We had to absorb the losses 70-80 percent of the time," Dadheech recalls. "After we started checking ID, the fraudulent claims dropped to just one or two a month."

2. Move to using chip cards

Update your terminal to accept chip-enabled cards and ask customers to use them because chips will enable proper reading, communicating and processing of transaction data from the card. If for some reason a card does not swipe successfully, imprint the card and ensure the signature and all transaction information is transferred to the imprinted draft, including the merchant name and location, the three-digit code on the back of the card and the authorization for the transaction.

"With chip technology, businesses can reduce their liability on chargebacks to their business due to counterfeit or lost and stolen cards." says Laura Miller, President for Merchant Services Commercial Banking Segment at JPMorgan Chase. "And keeping your systems updated with the latest software and technology to protect your customers from fraud is critical. For example, new industry standards are asking that all payments terminals comply with SHA-2, the latest encryption, and it's fundamental for keeping businesses and their customers protected and secure." 

3. Charge the exact amount

Always obtain an authorization for the exact amount of the transaction processed to the card. If authorization is declined for the full amount, don't try to get authorization by splitting the transaction into smaller amounts. Any deviation to the original amount charged makes it more challenging to contest a dispute. 

4. Use ID verification services

Erik Groset, the owner of an online site that helps people play fantasy sports, said he gets a small number of people who sign up fraudulently each month. "People using our service are logging in from a computer, so we can verify to a degree who they are," he says. So he'll know if someone whose credit card address is in California is actually using the site from Pennsylvania. When people use the site on mobile phones, he can even tell the mobile device ID, further improving security since it more closely ties an activity of a consumer to an actual device.

Credit card industry experts say that Groset is smart to do an identity check. Small businesses are advised to invest their anti-fraud resources in services like Verified by Visa® and Mastercard SecureCode®, which help small businesses verify the card user's legitimacy. Another service that can be used is address verification, that can match the cardholder's address with the shipping address. A big red flag is when a customer asks you to ship out of the country.

5. Be observant during the transaction process

Look out for other red flags. Is a customer nervous? Does something not feel right about the transaction? Beware of large purchases. Use your intuition when the customer is in the store and has readily agreed to a $5,000 purchase. That might help you make your sales goal, which a fraudster knows will blind you to their fraudulent activity.

The best thing a merchant can do is practice due diligence in credit card transactions as the business occurs. Because of the difficulties of overturning reports of fraudulent use of their cards from consumers, the best way to fight fraud is before the fraud happens.

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