Although the boom in Internet sales is good for many small businesses, it has also created more risk for companies using a merchant account to do business. Because customers make purchases online, it is difficult for businesses to verify that credit cards are being used legally, which leads to a heightened risk of fraudulent transactions. Not only do these fraudulent transactions result in lost sales, they can translate into increased rates and even closed accounts if charge-backs become too frequent. There are several ways businesses can protect against these costs, from verifying customer address to manually settling purchases.
One of the most common ways to prevent fraudulent transactions is to ask for a Card Verification Value. A CVV is a three digit code located somewhere on the card that is in a separate location from the account number. Because this number is not listed on documents that contain credit cards, it prevents thieves who have stolen numbers from using the card to make purchases through merchant accounts.
Another good method to prevent the costs of criminal purchases is to ask for the billing address. If the numbers (often the zip code) do not match with what the credit card company has on file for that card, the purchase will be declined. It is unlikely that the person using the card fraudulently will know the address that goes with the card.
Payer authentication is another tool to prevent fraud. With these programs, cardholders set up a personal password with their credit card company and a pop-up window will appear when they are ready to make a purchase. One major drawback is that this method doesn’t completely protect the merchant account because it will be responsible for a portion of the fraudulent purchase. The pop-up boxes aren’t always reliable either, adding another level of uncertainty.
Manual settlement is an option for those businesses that don’t have a large number of transactions. With manual settlement, the merchant must approve every transaction before it can be charged. This gives the merchant the ability to check for false data, verify information, and look for unusual patterns that may appear from unauthorized users. Although this method is effective in catching fraudulent transactions, it can be very time consuming depending on transaction levels, and by making legitimate customers wait for approval real sales might be lost.
When protecting a merchant account from fraudulent transactions it is also important to consider what the effect will be on actual customers. Although prevention is necessary, companies shouldn’t make it so difficult for real customers to buy that they go elsewhere. Use one or two of the methods above to keep fraud low and keep customers buying.