Protecting Your Business from Credit Card Fraud: A Guide to Chargebacks

A thief can quickly cost your business thousands of dollars.

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Credit card fraud is a serious economic problem that costs merchants $190 billion a year, according to a 2010 LexusNexis study. If someone makes a purchase at your business using someone else's credit card, the cardholder can dispute the transaction and the charge will typically be reversed -- a process known as a chargeback. But chargebacks can leave you empty-handed, and there are several steps you can take to reduce their cost to your business.

Chargeback Basics

If a cardholder notices an unfamiliar purchase on their credit card account, they can report the purchase to the credit card company and initiate a chargeback. If the credit card company finds that the card was stolen, they may cover the purchase and refund the cardholder's money, while still paying you. However, this depends upon the cardholder agreement and your agreement with the merchant. In other cases, the card company might initiate a chargeback. You'll have an opportunity to dispute the chargeback, but if the card company finds that the card was fraudulently used, you'll lose the money you made on the transaction.

Fraudulent Chargebacks

Some customers use chargebacks to get products for free or to get a refund on a purchase they regret. If you suspect that the card wasn't actually stolen, you may be able to fight the chargeback by providing a signed credit card slip, video footage of the customer using their card or evidence that you regularly do business with the consumer. However, if you're mistaken and the card was actually stolen, this can alienate a potential customer, so try to address the issue with the customer first.

Getting Your Money

If you lose money due to a stolen card, your only recourse will be to go after the thief. If the police or card company locate the person who stole the card, you can sue them for lost money -- often in small claims court. You can also file a police report of your own, giving the police any and all information you have that might help them locate the card thief.

Preventing Fraud

The most effective way to avoid losing money is to prevent fraud in the first place. Requiring that customers provide a photo identification for each purchase can reduce the risk of someone using a stolen card at your business. If you do business online, many credit card merchants offer verification services that require customers to input additional information before they can use their cards. Requiring online shoppers to verify their identity through these services can greatly reduce fraud.