Online Credit Card Fraud and Small Business
By: Josh Fuld | December 12, 2012 at 10:48 pm

Online Credit Card Fraud and Small Business

When I was in college, I knew people who used to trade credit cards with their friends. They’d go to the mall, buy video game consoles, concert tickets, clothes and other things they wanted. At the end of the day they would each call the credit card company and say that they lost their card. The charges were wiped of of these kid’s cards, and the credit card company sent them new cards. They lost nothing but gained thousands of dollars worth of stuff. What I didn’t know at the time was that it was the owners of the stores that they used the credit cards in that were out the money, not the credit card companies.

I checked my email last night before going to bed and saw an online sale for $4000, and right away I knew it was credit card fraud. The billing address and shipping address were different and the person ordered five Shimano Stella 1000 reels. Five years ago when we started doing business on the web I was clueless about credit card fraud and how it could put you out of business. We fell victim to credit card fraud a few times. Nothing near as large as a $4000 hit but when you have a small business any money that is lost can really hurt you and sometimes put you out of business.

What I quickly learned was that in the relationship between credit card company (Visa, MC, etc) and the merchant (J&H), the responsibility for losses due to credit card fraud falls on the merchant. If your credit card is stolen and someone use it at or any other business, it is the business that is 100% responsible for the cost of the fraud. If a person buys $100 worth of merchandise and we ship it and later find out that it was fraudulent, we lose the $100. Visa, Mastercard, American Express and Discover do not take any losses due to fraud. Neither does the individual who’s card was stolen. That person just calls up, says they lost their credit card and the credit card companies go to work reversing the charges and pulling the money out of the merchant’s account.

Most people who commit credit card fraud aren’t that bright. They are just hoping that they can sneak in and trick you. They typically do transactions after work hours to try and hide among other nightly transactions. The most common item these people want are Shimano Stella 20000 reels. They are expensive and easy to turn into cash. As I mentioned, most of these scammers know the Stella’s value but don’t know how to use it so they ask to have a huge spinning reel spooled with 8 lb test mono. This is a clear sign of fraud.

There was a point a few years ago where people were putting in fraudulent orders 1-2 times per week. We set up aggressive filters on our web site to let us know about these charges and it was easy to stop. In several cases, especially with overseas orders, we turned down credit card orders from what were most likely legitimate customers because it just wasn’t worth the risk. A small business like ours cannot afford to take $1000 hits, especially not 1-2 times every week!

Fraud is generally not a big deal to large companies like Bass Pro and Cabelas. They do so much business that they can just write it off as a loss and keep chugging along, but for a small business with limited capital, that is just not feasible. I’ll give you an example. Let’s say a small business gets hit with $1000 worth of fraud, and let’s say that they double their money on all sales. So they buy something for $50 and sell it for $100. In order to make up for the $1000 loss, they would have to make 20 $100 sales. Now let’s say that company makes 25% profit per sale. Now they would have to make 40 $100 sales just to get back to where they started! Now all the profits are going to pay for fraud instead of paying employees, rent, the electric bill, merchandise, advertising, etc.

We’ve tried calling the police but because most fraud happens overseas or across state lines there is nothing they can do. We have also tried contacting the FBI but they weren’t much help either.

The best way to prevent fraud is to look at every transaction that comes in over the web and to not jump at every sale. Sometimes it’s in the company’s best interest to turn down the sale. Fraudulent transactions are usually easy to spot. They put in large orders shipping to a different shipping address or overseas. Another tactic they use is to send an email in advance stating that they want to place a large order for an expensive item and they want it shipped overseas via FedEx Express and they want to pay with a credit card. I delete all of those emails right away!

I refunded the $4000 charge and was able to find contact information online for the person whose credit card was used. I let them know what happened and asked them to contact their credit card company to let them know that she had been the victim of fraud.

Online credit card fraud is a big problem for small business. In an ideal world, the credit card companies would be responsible for the loss instead of merchants but I don’t see that happening any time soon. I would like to see a pin number added to every credit card transaction like you need when you use a debit card. Yes that might slow things down a bit and add another step to checkout but it would also help to drastically reduce the amount of fraud. The credit card companies can add more security codes to the physical credit card but that doesn’t stop fraud if the criminal has the credit card.


Tags: online credit card fraud

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