Protection Strategies With Credit Card Fraud Detection for Merchants

Let’s Explain Credit Card Fraud

Credit card fraud happens when unauthorized individuals use a cardholder’s personal information to make purchases or withdraw money. It can involve physical cards or just the card details, and it poses a significant financial risk to merchants due to chargebacks, lost revenue, and potential legal issues.

Here are some common types of credit card fraud that can happen:

• Card-Not-Present (CNP) fraud happens when the cardholder’s details are used for online, phone, or mail transactions without a physical card. It’s common in e-commerce and digital transactions.
• Card-Present fraud involves using a stolen or counterfeit card in a physical store. It’s less common, but it still happens, especially in regions that haven’t fully adopted EMV chip cards.
• Identity theft is when fraudsters use stolen personal information to open new credit card accounts or take over existing accounts. This often leads merchants to issues with chargebacks.
• Friendly fraud (chargeback fraud) happens when a legitimate customer disputes a charge with their bank, claiming it was unauthorized, despite having received the goods or services. It often results in a loss for the merchant.

Statistics That Illustrate the Impact

In 2024, global losses from credit card fraud are projected to exceed $35 billion, with card-not-present (CNP) fraud, particularly in e-commerce, showing a significant increase. E-commerce merchants have reported a 30% rise in CNP fraud compared to the previous year.

North America, which accounts for the highest value of global e-commerce fraud, faced over $8 billion in losses due to chargebacks in 2023, a considerable portion of which was attributed to fraudulent credit card transactions. Additionally, according to statistics, about 60% of small businesses that encountered credit card fraud experienced financial losses that took over six months to recover.

Key Indicators of Fraudulent Transactions

There are signs that can show us something’s amiss, and some behaviors are literally red flags. Indicators of fraudulent transactions include unusual buying patterns, such as abnormally large purchases in an online shop or several small transactions occurring within a short time. These can signal attempts to use stolen cards before the rightful owner realizes it.

Another red flag is suspicious shipping details, especially when the billing and shipping addresses do not match or when the shipping address is linked to P.O. boxes or freight forwarding services. Additionally, purchases from unusual locations or drastic changes in a customer’s buying behavior, like sudden luxury item purchases, may also indicate fraudulent activity.

What Is Credit Card Fraud Detection?

Credit card fraud detection is the process of finding suspicious or illegal activities involving credit card purchases to prevent financial losses. So, the next question would be – how does credit card fraud detection work? It involves monitoring transactions in real-time or through batch processing to spot signs of fraudulent behavior. It could include purchases for large amounts of money, lots of small transactions happening quickly one after the other, or purchases coming from unexpected locations.

Effective Detection for Merchants

In an increasingly digital world, the threat of credit card fraud grows ever stronger and is becoming a constant risk for merchants. Businesses must adopt effective fraud detection strategies to safeguard their revenue and maintain customer trust because fraudsters continue to use evolving tactics. There are several effective strategies to help merchants protect themselves from credit card fraud.

Machine Learning and AI-Based Fraud Detection Tools

One of the best ways for businesses to fight fraud is to use tools that combine machine learning and AI-based fraud detection. These technologies look at trends of transactions in real-time and quickly find any changes that could be signs of fraud.

For example, machine learning algorithms can spot purchases of odd amounts or places likely to be a security risk, so that action can be taken immediately. Forbes said that using AI to find fraud not only makes the process more accurate but also cuts down on false results.

Setting up Transaction Limits and Velocity Checks

Merchants can catch fraudulent activity early by limiting the largest amount that can be spent in a single transaction or keeping an eye on the number of transactions that happen within a certain time frame. Fraudsters often use stolen cards to make large purchases or a lot of transactions quickly. This approach can help stop them, and make it much less likely that fraudulent transactions will happen.

Verification Service (AVS) and Card Verification Value (CVV) Checks

Basic security measures, such as Address Verification Service (AVS) and Card Verification Value (CVV) checks, play a vital role in validating transactions. AVS compares the billing address provided during a transaction with the one on file with the card issuer, while CVV checks ensure the cardholder has the physical card by requiring the security code. Together, these measures help to catch potential fraud before it impacts the merchant.

Monitoring Chargeback Ratios

A rise in chargebacks may mean that fraud is still ongoing, which makes businesses want to look into it further. Businesses can improve their ability to stop fraud in real-time by looking at these measures. This makes their defenses against losing money stronger. Some studies show businesses can better understand their risk exposure and take the necessary precautions by keeping track of chargeback ratios.

The Role of EMV Chip Technology and Tokenization

EMV chip cards make a new transaction code for every purchase. This makes it very hard for thieves to copy the card or use old transaction data. This dynamic data sharing between the card and the terminal lowers the risks that come with fake cards.

During transactions, tokenization also changes sensitive card information with a “token” that is not sensitive. It means that even if transaction data is stolen, it can’t be used without the associated encryption key. This adds an extra layer of security.

However, while EMV and tokenization significantly reduce card-present fraud, they are not foolproof. Limitations include the potential for card-not-present (CNP) fraud, which remains prevalent in online transactions, and the risk of human error, such as employees not properly securing card readers.

Real-Time Transaction Monitoring

If a business monitors a transaction while it happens, it can quickly spot suspicious activities and take action to prevent losses. This proactive approach helps reduce the impact of fraud and protects both the business and its customers. Key benefits of real-time transaction monitoring include:

• Immediate detection, where merchants quickly identify unusual purchases or patterns that could indicate fraud.
• Instant alerts where they receive notifications when a suspicious transaction is detected, which further allows fast intervention.
• Enhanced security is where you can protect your business against financial losses and build customer trust by addressing potential fraud promptly.

Real-time alerts and notifications are particularly valuable. When a transaction is flagged, both merchants and cardholders can be notified immediately. This enables quick verification of the transaction or freezing of the card, which minimizes the chance of fraud.

Best Practices for Training Employees

Training employees is essential for helping merchants reduce credit card fraud risks. When well-trained, employees can spot possible theft more easily and take the right steps to handle it effectively. There are certain methods with which staff can more easily recognize and respond to fraud.

Recognize Common Signs of Fraud

Teach staff to be aware of red flags like unusually large purchases, using multiple cards for one transaction, or reluctance to show identification. Unusual behaviors, such as rushing the payment or frequently changing the payment method, could also signal fraudulent intent. Spotting these signs early can help prevent losses.

Practice Handling Suspicious Situations

Role-playing scenarios can be a practical way for the team to gain experience in identifying suspicious activities. For instance, practicing how to manage a situation where a customer repeatedly tries to use a declined card can prepare staff for real-life encounters with potential fraud cases.

Set Clear Procedures for Managing Risk

Provide a straightforward plan for dealing with suspicious transactions. This may involve requesting additional verification, notifying a supervisor, or using a fraud verification hotline. Having consistent procedures in place ensures that any potential fraud is handled efficiently across the organization.

Steps to Take When Fraud is Detected

It’s important to act quickly once the scam is detected. That way, you can prevent any further damage from happening. Here are the key steps to follow:

• Temporarily stop the transaction or freeze the account involved to prevent any additional fraudulent activity.
• Collect relevant information such as purchase amounts, dates, locations, and customer data. This helps in building a case for further investigation.
• Keep thorough records of the suspicious activity and all related details, including any communications with the customer or other parties. This documentation will be useful for future disputes or legal actions.
• Conduct a deeper analysis to confirm the fraud and determine if there are other related fraudulent activities.

Taking these steps promptly ensures that you can manage the situation effectively and minimize potential losses.

Working With Credit Card Processing Companies and Law Enforcement

Collaborating with your credit card processing company is key to managing fraud cases. Companies offering merchant services and credit card processing can offer valuable resources, such as fraud monitoring tools or guidelines for reporting the incident.

In cases involving significant losses or criminal activity, law enforcement may also need to be contacted. Sharing information with the authorities can help track down the perpetrators and potentially recover stolen funds.

Reporting and Handling Chargebacks

Chargebacks are a common outcome of credit card fraud, where customers dispute a transaction and request a refund. It’s important to respond to chargeback claims promptly and provide evidence to support your case, such as transaction records or proof of delivery.

Working closely with the credit card processor can improve your chances of successfully contesting the chargeback. Additionally, analyzing chargeback patterns in your merchant statements can help identify vulnerabilities in your fraud prevention strategies and strengthen them accordingly.

Strengthen Fraud Prevention with Proper Payment Processing

Fraud prevention and timely detection are essential for protecting a business from financial losses and preserving customer trust. There are many strategies and detection tools that can significantly reduce the risk of fraud and its associated costs.

Partnering with a trusted processor like Merchant Chimp and investing in credit card processing services ensures your business is well-equipped to combat fraud. We offer different tools and expert guidance to help you stay ahead of potential threats. Contact us today to learn how we can help secure your business against credit card fraud.