Top 5 Most Common Causes of Loss When Managing Credit Card Payments
It is rare to find an online shop that does not allow customers to pay by credit card. Online shoppers expect it, and most online merchants readily offer the service. Accepting credit card payments is so common; most customers can’t name another way to pay.
However, there is an increased likelihood of sustaining losses while managing credit card payments without a clear understanding of the risks of accepting them. To help e-commerce merchants limit these risks, we are highlighting the 5 most common causes of loss when managing credit card payments for online shops. They can arise from various losses sustained from purchases made with stolen credit card information, chargeback fees, shopping cart abandonment, and chargeback friendly fraud.
Fraudulent Credit Card Transactions
Fraudulent credit-card transactions occur when stolen card information is used to make online purchases. Regardless of how fraudsters obtain the credit card information, they lack the authorization to use the funds linked to the card. As a result, online merchants can sustain two types of loss: merchandise value and original charge amount.
1) Merchandise Value
In general, cardholders have up to 120 days to dispute a fraudulent charge on their cards. Depending on terms and conditions set by the card’s network, this period may be longer or shorter. This grace period is great for credit cardholders, but not for online merchants. Most online merchants process online orders within 1-2 business days. Before the real cardholder has a chance to notice the fraudulent transaction, the merchandise is already leaving the warehouse, in transit to the fraudster.
For merchants selling low to mid-priced products, recovering these products through the shipping carrier may cost the company more money than the value of the product. For higher priced in-transit items, products may be recovered but with additional fees. This is not likely the case once a product is delivered; the main way to start the process of recovering the merchandise is by filing a police report.
In most cases, online merchants never retrieve the merchandise, meaning they must make up for the cost of these products. The type of merchant these losses affect most are those who sell products with low margins. Because the acquisition cost of the item makes up a majority of the product’s selling price, it is easy for the sale of those products to become unprofitable.
2) Original Charge Amount
Once a cardholder notices a fraudulent charge, they can file a dispute with their card issuer. If the issuer finds the dispute to be valid, they in turn file a dispute with the merchant’s bank. Once the merchant receives a fraudulent dispute, the merchant is debited the disputed amount. The merchant’s bank will request specific documentation from the merchant. If they are unable to provide the documents requested, the cardholder filing the dispute is given a refund.
If the merchant can provide the documents, the bank reviews them to determine if the transaction is fraudulent. If the bank determines the transaction is fraudulent, the cardholder is refunded. Depending on the size of the investigation and the information needed, the whole process can take up to 45 days. During this time, the merchant’s bank will withhold the disputed amount from the merchant account.
3) Chargeback Fees
Unfortunately for online merchants, losing the product and original charge amount aren’t the only consequences. Every time a claim is filed against an online merchant, the merchant account is assessed a chargeback fee. This fee, averaging between $5 and $35, covers the costs associated with handling the claim. Regardless of the result of the claim, merchants must pay this fee. In addition to the standard fee assessed, merchants may have to pay additional charges to fight the chargeback.
Although the occasional chargeback fee may seem marginal, excessive chargeback claims against the merchant can add up quickly. Receiving too many chargeback claims can also result in increased processing rates, higher reserve requirements, or in the worst case, account termination.
4) Shopping Cart Abandonment
To combat fraudulent transactions, online merchants can require customers to provide detailed verification information. For some merchants, they can require credit card numbers to be validated against the cardholder’s name, billing address, and security code. Additionally, merchants can activate 3DS (3D Secure) - more widely known as Verified by Visa, MasterCard SecureCode, and American Express Safekey - which requires online shoppers to enter a separate password for additional security.
Although, these security measures deter fraudsters from taking advantage of your shop, they may also deter real customers from shopping on your website. Real customers unfamiliar with their billing information can get easily frustrated and abandon their shopping cart. The same is true for customers unfamiliar with the 3DS verification process, which may be perceived as phishing because they’ve been taken off-site. Either way, having procedures that are too secure can drive customers to abandon their carts.
A couple of abandoned carts may not seem like a loss (given no money was returned), but consider the marketing cost needed to get the customer to the online shop. With each missed opportunity for conversion, the average cost of acquiring each customer increases. Unfortunately, there is no cookie-cutter way to balance the loss of a sale with potential fraud screening processes. For most online merchants, it requires trial and error to find what works best for their shop.
5) Chargeback Friendly Fraud
Some purchases are made with the sole purpose of filing chargeback claims. This type of fraud does not require hacking or stealing credit card information. Rather, this type of fraud is carried out by individuals taking advantage of services provided by their credit card provider and the card networks.
Unlike fraudulent credit card transactions, these cardholders have authorization to use the card. These are real people making legitimate purchases. However, they are making the purchase with the intent of filing a dispute or demanding a refund. These opportunistic people typically file claims stating:
- The product is not as pictured.
- The product is not as described or marketed.
- The product was never delivered or received.
- There is a product missing from the package.
Finding proof to dispute these claims is difficult. In most cases, it boils down to the word of the merchant versus the customer. This type of fraud can be very difficult to detect. However, merchants can protect themselves from these situations by keeping an eye out for patterns such as recurring IP addresses, card holders or customer accounts and blacklisting these individuals.
It is important to stay vigilant and prevent shoppers from getting away with this type of fraud. Not only is chargeback friendly fraud easy to commit, it is easy to learn. With information readily available online, individuals who commit friendly fraud can easily share your vulnerabilities by listing instructions on how they got away with defrauding your online business. The potential increase in new defrauders on your website is the reason online businesses need to build a strong reputation for cracking down on this type of fraud early.
Although credit card payments are the most common way to pay for products online, merchants can experience losses when managing them. The most common causes are loss in merchandise value and billed amount, chargeback fees, shopping cart abandonment, and chargeback friendly fraud. With so many ways to lose money, it may seem like losing money is inevitable. The opposite is true.
Being aware of the most common types of fraud and losses gives merchants a jump-start at detecting and managing fraud. By researching, implementing and enforcing security measures for all their credit card payments options, online merchants can more easily manage losses associated with managing credit card payments.
This is especially true for managing losses associated with chargebacks. Whether through strict credit card verification or iron-clad return policies, the earlier chargeback management is implemented, the faster an online business can start to fine tune the best method for managing losses from accepting credit card payments.