Estimates worldwide suggest that credit card fraud tops $1 billion a year.

MasterCard reported in 1995 that 9 cents of every $100 dollars was lost to fraud, representing about $400 million of $470 billion in transactions processed.

MasterCard International claims only a small fraction of that $400 million is charged back to the merchants. Out of that total how much can you afford to lose and what can you do to protect yourself against it?

As a web merchant, you need to understand the term "card not present". Since this is how the majority, if not all, of your transactions are paid you'll need to take certain precautions in order to defend yourself form purchases made with stolen credit card numbers.

Remember, the term "phony" comes from hucksters who began using telephones, a long time ago when telephones were new, to defraud unsuspecting consumers.

In the typical 'real world' the credit card is presented in person, additional id can be examined, the consumer signs the receipt, and the signatures can be checked. So, when a consumer disputes a charge, the very first thing the bank will require is a copy of the signed receipt. If the merchant can provide the signed receipt and has followed the credit card's general acceptance policies, the merchant is in a good position to defend against the charge back.

However, on the Web, you will not have a signature on the receipt, and chances are very good you will not even see the customer in person. If you've accepted payment from a stolen credit card you will have to reimburse the legitimate card holder's bank and suffer the loss.

What can you do to minimize your losses?

1. Make sure your processing equipment uses the Address Verification System (AVS) that the credit card companies provide. AVS matches the name and number with the address or zip code to the billing information of the credit card.

If they don't match you should be aware that there is the possibility that someone is trying to make payment with a stolen card. Further investigation on your part should be done to verify the consumer's identity.

2. Never ship products to any other address than the one you verified. Obviously that would defeat some of the protection gained by the AVS verification.

3. Always ship in such a manner that you receive a signed receipt upon delivery. ALWAYS request that the shipping company obtain a signed delivery receipt from someone at the delivery address. This documentation will help prove 'proof of delivery' in the event your customer claims the product wasn't received.

4. If fraud is suspected check that the telephone number area code given matches the geographical location of the shipping address. You may even want to call the card holder to verify that it is indeed them that placed the order.

5. If a new customer places an order that is significantly larger than your average order this might be an indication of attempted use of a stolen card number.

An abnormally large number of repeat orders placed within a few days of each other from the same consumer or credit card could also indicate use of a stolen card number. In either case you would be wise to take extra precautions before shipment.

6. Determine your level of acceptable risk and set policies and systems in place that meet your goal. For example, if your cost of product/service is low compared to its selling price you may feel using just the AVS system is adequate.

On the other hand if your cost of product/service is high compared to its selling price you may want to use other measures of checking to ensure that each payment received has been verified by telephone or in some other acceptable manner.

If you can not find an acceptable comfort level using the above strategies, please contact us as there are other on-line payment systems available that can offer your company more 'fraud prevention' systems. These other systems do more checking and screening than you could do yourself and, therefore, have additional fees associated with them.

Keith R. Johnson
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