It’s not fun spending extra money or having someone steal from you. When it comes to fraud, if something doesn’t feel right about the sale it’s, probably best not to accept payment on a credit card. Use your best judgement and don’t get carried away by the prospect of excessively large sales. If it’s out of the ordinary, you need to take a step back and assess the risk of completing that sale. Also, if you keep an eye on your processing statements and transactions, most losses can be easily preventable. Here are six common ways that businesses can lose money through their merchant accounts:
This is a form of internal fraud where employees make returns to their own credit cards while hoping to hide those returns with the day’s normal business. This can be fairly easy to catch and remedy, however you need to be reviewing your daily batches and comparing those to your transactions.
This type of fraud is usually found in the big box businesses however it can also be applied to small and medium businesses. Basically, it’s the act of purchasing something at a discounted cost just for the purpose of returning it to another location or business for a higher price. Many stores will accept goods back for store credit even if you do not have a receipt. The big box stores are hip to this trick and keep track of who is returning items and will go as far as telling customers they are no longer eligible to return items to their stores. Smaller businesses, however, are sometimes more inclined to accept these returns to help build relationships with customers. In these days of mega online stores and a multitude of discount sellers out there, it’s easy for a fraudster to take advantage of an unsuspecting business. It can be as simple as browsing what you have for sale locally, finding that same item for half the price online, and then returning it to your store for credit.
You know there is nothing friendly about friendly fraud. This takes a special type of person to knowingly commit this form of fraud. A customer comes to your business and makes a purchase like anyone else. It’s likely that nothing will seem off about the transaction to you. Once they leave the store is when the fraud is perpetrated. This customer contacts their credit card company and makes specific claims against the transaction knowing it will be next to impossible for the business to defend itself through the chargeback dispute process. The cardholder almost instantly gets credit back on their card, and they never have to return the product. Free stuff for them, a total loss for the business.
I think of this type of fraud as what the sketchy people from #3 move up to. It takes a ridiculously small amount of social engineering to convince most businesses into assisting the fraudster in walking out with goods without actually paying.
How does it work? A fraudster shops just like anyone else and brings their items to the checkout. Once the items are rung up, they will make some sort of excuse why they need to contact their credit card company to get prior approval. Many times, the fraudster will give you a credit card that declines when you try to run it. The cardholder will apologize and call their “card issuer”. After a bit of a conversation, they will then tell you their credit card company declined the transaction because the amount was abnormal, and they suspected fraud. The fraudster/cardholder may tell you their credit card company gave them an approval code that will allow the transaction to go through. They may also hand you their phone and the “credit card company” might walk you through processing the sale. The thing is the authorization code that is provided by the cardholder, or “credit card company”, is fake. It will settle like any other sale, but several days to a month later the actual card issuer will dispute the transaction saying the approval code used was not issued. At that point, the merchant is required to pay the card issuer back in full. Meanwhile, the fraudster is long gone.
Chargebacks occur when customers dispute a transaction, leading to a reversal of the payment. Merchants often incur chargeback fees, which can range from $20 to $100 or more per chargeback. Frequent chargebacks can result in lost revenue and additional expenses.
Processing statements are probably one of the last things most business owners want to think about. If the funds are making it to their bank account, there’s not much reason to review the statement. But the processing statements are where the processor will provide notice of changes to the account. Many times, these could be related to rate and fee increases. Contacting your processor to ask about new fees or changes to your fees can result in you saving money. Act quick though: with a merchant statement, you generally only have about 45 days from the end of a processing month to dispute any charges before those charges are considered accepted and final.
Your merchant account should be something that helps you generate sales, but if you're not being pro-active, it can cost you money as well. You won’t ever be perfectly protected from loss, but a little work today can pay off in big ways down the road. Contact us today to make sure your merchant account is on the right track!
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