Card Not Present Fraud Is On the Rise – Are You Prepared?
Merchants Must Understand Modern Card Not Present Fraud Risks
Card not present fraud is a growing concern for online merchants. If you aren’t aware of the risks, you won’t be able to protect your business.
Card Present vs. Card Not Present Fraud
Card holders and merchants alike are inundated with warnings and admonishes about the dangers and pitfalls of credit card fraud. With the recent adoption of the new EMV standards (the ‘chip’ cards), the threat of having a credit card stolen and used to make purchases at retail or traditional locations is no longer an individual’s highest concern.
Today’s criminals have turned their attention to passing stolen credit card numbers through online retailers who often have lower verification standards for processing credit card sales.
Online merchants are now struggling to deal with the realities of an increase in card not present fraud. Attempting to verify the legitimacy of a sale without off-putting valid customers is a tenuous and time-consuming process. According to LexisNexis’ 2015 report, it is up to seven times more difficult to identify card not present fraud than fraud committed in person.
Types of Card Not Present Fraud
Card not present fraud can take several different forms:
- friendly fraud
- merchant error
- criminal fraud
Friendly fraud, the most common type of credit card fraud, occurs when a customer contacts their bank to request a chargeback after a transaction has been completed.
Chargebacks may be filed for multiple reasons, including:
- The item was never received
- The item was misrepresented
- The cardholder wants to return the item but either cannot contact the merchant or is unwilling to take the time to process the return.
As a result, the merchant’s account is debited for the amount of the sale, they lose the ability to re-sell the items and they are penalized with chargeback fees.
Criminal fraud is a result of identity theft. A criminal steals another’s identity and credit card information, and then uses the information to place fraudulent orders with online retailers. As a result, the merchant loses merchandise that is shipped and is debited for a chargeback when the cardholder notices the fraudulent charge.
Merchant error occurs when merchants defraud a customer (either intentionally or unintentionally). This could be the result of:
- Errors within the merchant’s card processing system
- Double billing customers
- Other mistakes that could be avoided.
This is the least common form of credit card fraud, yet is the primary reason that chargebacks were created in the first place. Ironically, the system created to protect consumers is now being used to defraud merchants.
Current Card Not Present Fraud Trends
The current LexisNexis Study revealed that the costs associated with fraud loss rose in 2016 to $2.40 (an 8% increase from 2015) per dollar, resulting in even greater revenue loss for online merchants from last year.
Revenue loss to fraud rose 11%, with 1.47% of revenue being lost to fraud. Despite an increase in fraud prevention programs, merchants reported an increase in false positives by 31%– a further loss to merchants already struggling with the rising costs of fighting fraud.
Card not present retailers who have received chargebacks do have a viable resource to fight back. Chargeback disputes allow a merchant to prove that the original charge was authentic and recover the lost revenue. This dispute process, known as representment, requires the merchant to offer evidence such as transaction documents, signed delivery receipts or other qualifying materials to the bank to verify the sale.
To combat the rising numbers of card not present fraud, merchants must take action to both prevent and dispute chargebacks.