Smaller merchants with big-ticket items can be wiped out with just a few fraudulent orders; sometimes it only has to happen once. I wrote an ebook, “Protect Your Merchant Account from Fraud & Chargebacks” that goes into great detail on this subject. I will highlight some of it here.

Chargebacks happen when a cardholder disputes a credit card purchase. There are a variety of reasons a cardholder may dispute a charge. Some examples of these are:

* Never receiving the item ordered
* Not getting what they thought they were buying
* Their credit card was stolen and they did not authorize the charge
* They could just be a thief and use the chargeback clause to their advantage

In the event of a chargeback, the card-issuing banks will initiate a chargeback against the merchant. The funds for that sale are pulled from the merchant’s bank account and the merchant may or may not be notified of the chargeback and be given the opportunity to dispute the chargeback. I was told by one really big acquiring bank that they were not obligated to notify the merchant of a chargeback. Anyhow, the merchant and merchant bank knows nothing of the chargeback until it is over and done with. Keep in mind, the customer’s card issuing bank is the one who initiates chargebacks.

The most important part in accepting a credit card is to do your best to verify the cardholder is actually placing the charge. On the Internet, this can be done with AVS (Address Verification System). Not a 100% guarantee, but it is the best available right now. AVS will attempt to match a portion of the customer’s credit card statement billing address against the billing address the customer placed during the order. If you get an address and zip code match, well chances are the actual cardholder or someone authorized to use the card placed the order. If you get a match of one or the other, then it is your call if you want to accept the credit card. I have a merchant who does between 13,000 and 15,000 online transactions per month and will accept a partial match, but rejects all that come back with no match. His chargeback rate is pretty low and this seems to work for him. If you do not get any match, then you need to sit on the order, jump up and down on it, and chew on it for a while and try your best to get in touch with the customer. If you cannot, then it is in your best interest to reject the order. Now the limitation of the AVS system is that it only works in America with American orders. There is no system in place, as of yet, for accepting International orders. As the attorney I interviewed in my ebook says, “You accept International credit card orders at your own risk.”

There are a few hotspot countries you would be best to avoid unless you have an established relationship with your client. Let me preface this by saying, I draw this conclusion from my own personal experience and the feedback I get from my merchants, so take it for what it is worth. This is not gospel! The countries are; any country that was part of the former Soviet Union, and Malaysia. They seem to have a larger than average amount of fraudulent orders placed from there.

Now for my most controversial comment, never accept an order placed with a FREE email address! I have been laughed at and scoffed at over this comment simply because there are so many honest people who use free email and this means losing orders. Simply put, you are correct. You will lose orders and sales and maybe even money if you follow this rule. However, I don’t think you will lose as much as you would if you accepted orders from free email addresses though. I know one merchant doing $45,000+ in credit card orders per month from the Internet that was following this rule. Then one day, he decided to throw the rule out and increase sales, as a result he almost lost his merchant account due to excessive chargebacks. Take it for what it is worth. Statistics show that more then 50% of orders placed from a free email address will be fraudulent. For more facts about this, I suggest you visit http://www.antifraud.com

There is more to a chargeback than meets the eye. Not only does a merchant lose the actual inventory and the purchase price, but there are also chargeback fees assessed to the merchant each and every time. These fees add up because they are anywhere from $15 to $50 a pop. Consult your merchant account provider if you do not know what fees you can be hit with. That is not all. Merchants who have excessive chargebacks, this is again defined by the provider, range from ½% to 2 ½%; a merchant can lose their merchant account. That is, get terminated without warning and could end up on the MasterCard Match List, a.k.a. Terminated Merchant File, which is looked at by other providers and if you show up on it, this means you will not get a merchant account. You can expect to stay on the list for 5 years too. There are new rules and regulations that have cropped up with the card associations. Visa has an International Fine for excessive International chargebacks and MasterCard has a fine for excessive chargebacks for high volume merchants. These fines are in the several $1,000’s to over $100,000. I am in the process of updating my ebook to reflect this along with an interview with T.J. Walker of http://www.antifraud.com and hope to have it ready within a few weeks.

Keep an eye on those transactions, use some common sense and good judgement and things will be well with your Internet business and merchant account.

My ebook, “Protect Your Merchant Account from Fraud & Chargebacks,” is free to download. To obtain a copy visit us at http://www.merchant-solution.com/

Todd Sumrall
http://www.merchant-solution.com/

The last person in line of protection when it comes to Internet fraud is the merchants. Listed below is ten helpful tips that you can take action on to prevent yourself from consumer fraud.

1. Carefully Review Orders – Whenever you receive an order, take some extra time and review the order carefully. Make sure the consumer filled out all the information correctly, and that all of the customer’s information matches. If the order is a fraudulent order, in most cases you can catch anything that doesn’t seem right by just carefully reviewing the entire order.

2. Contact, Shipping & Credit Card Information – The customer’s contact information should match up with the information they used for the shipping address and the credit card. If this information
doesn’t match up, then you need to find out why they want the products
shipped to another address or use a credit card with different contact information. This is a very good sign of a scamster, but not in all cases.

3. Address Verification Service (AVS) – Provided by most merchant
processors, you can run the AVS service on all of your transactions to ensure that the information they gave you matches with the information
on the file with the card issuing bank. If this information doesn’t match, then special precaution is encouraged.

4. Free Email Addresses – The majority of scamsters will use a free email address to hide their identity. To find out if the email address they used is a free one, just visit the domain name after the @. For
example: Bob@hotbot.com – Go to Hotbot.com and you can usually tell if that is a free email service provider. It might be a good idea for you to require an email address from their ISP on your orders forms.
This way, you can save yourself time with the free email address. If they did use one, just email them and let them know what is required of them.

5. Document All Contacts – To give yourself greater protection and a bigger fighting chance against the consumers, document all contacts you have with them. Use caller ID, a voice mail box and keep all emails to show as proof in fighting your case.

6. Domain Name Records – One unknown trick is to look up the domain name records of the domain name they are using in their email address to see if it matches with what they provided in the order. This will only work if they have their own web site and used their own domain as
the email address. Take the same procedure as explained in tip #4, and use Network Solutions’ database to search for the records. The url can be found here: http://www.networksolutions.com/cgi-bin/whois/whois Their information might not completely match up, depending if something changed or if they are using a business address verses a home address, but you should get an idea, like in the same state or city.

7. Above Average Order Amounts – Take special caution when receiving
noticeably high orders, the amount of products or services they are purchasing, especially around holiday seasons. Also pay attention to orders that are sent buying over night deliver. Since the scamsters aren’t paying for it, they don’t care how much it costs, and want it as fast as possible.

8. Use Fraudulent Notices – Place fraudulent notices, buttons and images on your order forms and your web site content. Let the customers know that fraudulent orders will be pursed to the fullest extent of the law. By having these notices, it will usually run off most scamsters.

9. Telephone Search – You can purchase a database of phone numbers on a CD or you can use services such as http://www.anywho.com/ that will do a reverse search on a phone number for you. This will allow you to confirm the contact information for the phone number that the consumer has provided.

10. Call The Consumer – The last and usually the most affective way to
clear up all confusion, is to call the consumer with the phone number they provided. If the number they provided isn’t good, then try contacting the consumer via email for a valid phone number.

By using these tips, hopefully you will not experience any fraudulent
orders. If you are scammed, then take serious action, by following the order and prosecute the fraudulent consumer.

Curtis Stevens
gotmerchant.com

You probably ask “Why are they treating this as if I’m applying for a loan? This should be as easy as visiting my favorite 3rd party processing service’s website and entering my checking account information”.

Merchants need to understand that there are very legitimate reasons for merchant providers being just a little more cautious than third party payment processing providers.

A) Merchant account providers have to abide by very different rules than other payment service providers. Visa/MC sets forth rules that are to be honored by not only merchant account providers but their sponsoring bank. And in the case of Visa/MC’s rules for merchant account providers, most of them have been put in place by Visa/MC after most years of being in the branded credit card business so they’ve drafted most of their current contracts in effort to prevent past operational mistakes from reoccurring – just as any business person drafts a contract, to prevent the worst and protect their interests

B) Most merchants do not understand that the government does have some sort of say so in what’s going in the merchant industry. It’s called Homeland Security, and though they’re not yet working as closely as they want to with merchant providers their Homeland Security rules to have parameters set in place where banks can be held responsible for clients that use their services to break Homeland Security laws. (Note: there have been reports that they are fighting hard to have all of merchant’s processing data turned over to them – and processors are fighting back, so it’s not 100% complete yet).

C) At least 95% of merchant account providers ask for voided check copies or bank letters for verification when a merchant applies for an account. Merchants sometimes wonder why the processor cannot simply “call my bank to verify the information and go in and approve the account”. Well in that method there’s no paper trail or proof in writing that the provider actually verified the checking account information. And in both the legal world and in Visa/MC’s rules this carries no weight in the case of a merchant signing in and causing a fraudulent catastrophe.

D) Merchants should also understand that with a real merchant account they are their processing their own sales either by allowing their customer to enter card data or by the merchant manually entering card data. They are entrusted with very sensitive credit card data. Have you ever noticed that with most 3rd party payments processing providers that are not real accounts often charge much more for allowing merchant’s access to their Virtual Terminal, which allows the merchant to enter their own sales as needed? Well this are because when the merchant can just take a card number and enter it themselves the risk of fraud does increase, as if the merchant isn’t the most honest business person they have the opportunity to steal card numbers and enter the numbers into the Virtual Terminal themselves at will.

This are why most third party providers often offer their “cheap” options as the option that only allows customers to enter their own data and charge much more for the Virtual Terminal, but as most merchants know this isn’t always the most feasible or professional way to do business, as sometimes your customers won’t want to have to “visit your website” just to pay for a product or service, they may want to pay for it via mail, phone, or even in person. This are where being entrusted to use the Virtual Terminal ethically comes in handy, and if the merchant are not ethical it’s ultimately the processor that’s responsible for resolving the fraudulent activity (explained more below).

E) Contrary to popular belief the merchant account provider and bank are taking in much more risk than most merchants believe. Here’s an example scenario where the merchant should be held responsible for fraud but a processing bank may be:

A merchant applies for an account, without the best intentions, they are approved by the bank’s underwriting.

The merchant gets access to stolen card information and manually enters that info themselves via either their Virtual Terminal or Web Interface. Let’s say $500.

The real customer, having no knowledge of where this charge originated sees that their card was used fraudulently.

The customer disputes that transaction with their credit card company considering it fraud because they did not authorize it.

The merchant provider/processor attempts to contact the merchant to inform them that they have a chargeback and will have to refund this customer because the customer charged this transaction back with their credit card company and the merchant has no proof of customer authorization (so the customer wins the Chargeback dispute).

The problem are that the merchant had bad intentions to begin with and they’re long gone.

In this case who has to refund the customer that money because the merchant are nowhere to be found? The merchant processor and processing bank does! Though the merchant are responsible for the fraud they cannot be tracked down in this instance but the customer must still be refunded. So the role of the provider in this case are to take care of reimbursing the customer – of course this would make any provider a little cautious about whom they sign on.

Operating a business that accepts credit cards is, at the end of the day, a responsibility that should not be taken lightly. Think about it, if it were your credit card being used by a business wouldn’t you want the bank that’s trusting and processing for that merchant has done due diligence to verify that the merchant has good intentions? Sometimes merchants are frustrated that providers turn them away as if only they should be the ones choosing in the process, but when there’s so much at stake providers have to ask just as most questions before boarding a merchant as a merchant has to ask before choosing a provider.

Joe Thompson
Thompson Merchant Services