At this very second, somewhere in the world, a business is completing a transaction but will never see that money. Payment fraud is a serious and debilitating issue for many businesses, especially startups that rely on all incoming cash to grow. Unfortunately, U.S. merchants are far and away the most common targets of fraud, experiencing 52 percent of total attack volume; the U.K. and other developed nations follow close behind. Thus, if you are struggling to build a business in an English-speaking region, you’re a potential target for fraud.
However, fraud comes in many varieties and for many reasons. If you want to save your small business, you should learn why you might become a prime target for fraud and how to protect yourself thoroughly.
Causes of Fraud
Depending on the types of payment involved, the causes of fraud can differ. For example, with checks — easily the most common fraudulent payment — slow account reconciliation and internal fraud are most likely, but with wired payments or automated clearing house (ACH) credit card payments, you are most likely to see fraud caused by malware on your system or scams from social engineering and phishing. Misuse of chargebacks is by far the most common fraud method, employed in more than 70 percent of fraud cases and costing merchants millions of dollars as well as their reputations.
It might seem like victim blaming, but if you are the target of fraud, it’s likely your fault. Always, it is a defect on your end that causes fraud to occur, even if your employees aren’t behaving fraudulently. Your defenses should be strong enough to dissuade potential attackers from trying to steal from you; if they recognize weakness, they will strike. Because you can usually control the systems that break down and cause fraud, you can control how attractive you appear to attackers. The stronger your front against fraud, the less likely you are to be attacked.
Types of Fraud
While fraud is almost always caused by your lax security, it can come in a variety of forms. Here are some of the most common types of fraud to watch for:
Merchant Identity Fraud
Requiring fraudsters to create a fake business through which they can channel stolen payment information, merchant identity fraud rarely directly impacts honest merchants. Before cardholders can recognize the charges and reverse the transactions, the fraudster dissolves the business and disappears. Still, it is a cause for concern, as the illicit profits from this fraud costs taxpayers: After one investigation, the Federal Trade Commission identified a four-year operation in which fraudsters earned more than $10 million through more than 100 false merchant accounts.
Buyer Identity Fraud
You might be warier of this type of fraud, which sees fraudulent buyers using falsified payment information to purchase products from legitimate merchants. Such payment information can be stolen or acquired through a stolen identity. Before the true cardholder discovers the transaction, the fraudster has products in hand; the merchant has no choice but to eat the charges. Fraudsters might also ask for refunds without a chargeback to acquire cash, which harms banks and merchants who must also refund the true cardholders.
Similar to buyer identity fraud, this type of fraud also requires a fraudulent buyer — but in this case, the buyer is the true cardholder. Instead of keeping either products or cash, the fraudster can retain both by making a purchase and demanding a chargeback after receiving the item. Unfortunately, friendly fraud is by far the most difficult to detect because the payments are truly legitimate. Thus, it is important that you develop a positive relationship with your customers to dissuade them from damaging your business in this way.
Protections From Fraud
As mentioned above, the best way to save your business from payment fraud is to erect strong defenses. To start, you should maintain strong PCI compliance and work with a PCI DSS service provider, which will protect you and your customers from theft and fraud. It is also wise to contact a cybersecurity firm to ensure your network and devices are not vulnerable to attack or infiltration.
Additionally, you should understand your rights when it comes to disputing chargebacks. Federal law guarantees cardholders the ability to challenge fraudulent transactions, but it also helps merchants avoid the most nefarious and expensive fraud. Before you process chargeback requests, you should understand chargeback time limits, your buyer’s obligations and your responsibilities in the process. If you take a hard stance against misused chargebacks and other types of payment fraud, you will scare away most fraudsters.