Avoiding Credit Card Fraud

Learn how to safeguard your business without alienating legitimate customers.

Q: It seems that credit card fraud is on the rise. What can I do to accommodate my customers, yet protect my business from criminals?

A: You're not alone in your concern about credit card fraud. A recent survey conducted by the Merchant Fraud Squad, an online crime prevention and education group, found that 47 percent of small and midsized Internet merchants believe fraud is one of the most significant problems their businesses face.

Fortunately for both online and brick-and-mortar companies, fraud is becoming more difficult, thanks to increasingly sophisticated encryption systems, verification services and transaction processing technology. Equally important, proactive payment service providers are teaching business owners to protect themselves through simple, yet effective, loss-prevention techniques.

The following tips may help you safeguard your business against credit card fraud:

Always ask for identification. You may ask for identification anytime you are presented with a credit card. Many cardholders even write "Ask for ID" on their cards to prevent unauthorized use. Most credit cards clearly state that they are not valid unless signed. Point this out to any shopper who has an unsigned card and say to the customer, "May I check your ID to verify your signature?" Address the customer by the name embossed on the credit card. If he or she does not respond, you should definitely ask for identification.

Learn to recognize a credit card's built-in security features. All credit and debit cards have distinctive characteristics that help protect consumers and merchants from forgeries. Each time a customer offers a card for payment, look for the following security features:

  • A hologram that changes color in the light.
  • A signature panel that resists erasure and protects the cardholder's signature.
  • A magnetic stripe that transmits specially coded information.
  • An embossed account number on the front of the card that matches the number printed on the back.

If you receive a credit card that seems suspicious, request a transaction authorization over the telephone by calling the code 10 (or "call for assistance") hotline number supplied by your payment service provider.

Let CVC2 and CVV2 help you make informed decisions. MasterCard and Visa implemented the CVC2 and CVV2 verification methods respectively to provide greater security to merchants who process transactions in situations where their customers' cards are not present, such as over the Internet.

CVC2 and CVV2 are three-digit codes used to confirm that customers possess genuine credit cards, and that their account numbers are legitimate. The codes are indent printed in the signature panel on the back of every MasterCard and Visa card, following the 16-digit account number. The values are not encoded in the card's magnetic stripe and they do not print on sales receipts.

Initiating a transaction with CVC2 or CVV2 verification is easy. Then simply submit the following information: credit card number, expiration date, CVC2 or CVV2 value and transaction dollar amount.

The card-issuing bank then checks the CVC2 or CVV2 value against its account records. A code is returned that lets you know if the information matches. Although this response does not directly affect the authorization of the transaction, it can warn you if something is out of the ordinary and help you decide whether or not to continue with the sale.

Utilize the Address Verification Service (AVS). Internet retailers, mail order/phone order merchants and other business owners who process card-not-present transactions should always use the AVS before they ship merchandise to customers. The service confirms numerical address information with card-issuing banks, and it returns codes that tell merchants whether the figures match.

Using the AVS is simple. To request a response, you must submit the numerical part of your customer's address as well as his or her five-digit ZIP Code, then complete the sales transaction. Within seconds, you'll receive an authorization code, along with an AVS response.

Again, the information provided by the AVS can help you make an informed decision about the sale, but it does not affect the authorization of the transaction. It is also important to note that AVS only works with credit cards issued by institutions that are based in the United States.

If you receive an AVS response that indicates the customer's street number and ZIP Code do not match the bank's records, you may elect to contact the buyer to resolve the issue. The customer may give you the toll-free customer service telephone number on the back of his or her card. Use this number to contact the card-issuing bank and verify the customer's name and billing address. Direct contact with a cardholder and his or her bank can help you avoid a disputed credit card transaction, also known as a chargeback.

Take an active role in fraud prevention. Transaction processing firms devote significant amounts of time and resources to protecting their merchants from financial crime. But you can also do a lot to deter criminals by following a few simple precautions, such as matching the signature or account number on a customer's credit card with the information on your sales receipt. Remember, you are the first line of defense against potential losses. By staying informed, you can work with your payment service provider to greatly reduce fraud and save your business money.

Cardservice International Senior Vice President of Sales John Burtzloff is in charge of sales strategy and execution and thus is responsible for managing all aspects of the company's marketing, communications, telesales, check guarantee, new accounts and sales support activities.

The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.

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