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Merchant Credit Card Fraud—What You Need To Know & How To Prevent It


Merchant Credit Card Fraud—What You Need To Know & How To Prevent It


Every year, businesses of all sizes lose millions of dollars to merchant credit card fraud. As technology advances, so do criminals’ tactics, making it increasingly difficult for merchants to spot or protect themselves from credit card fraud. 

In a recent merchant credit card fraud case, Rick Lisnek lost about $40,000 to a scammer who made several orders of diesel fuel and paid using a stolen credit card. It wasn’t until three weeks after the first transaction—and by the time the fuel was long gone—that Lisnek’s bank removed the money from his account in a chargeback, leaving him to bear the loss. 

Unlike consumers, merchants are not protected against credit card fraud charges, making it crucial for them to be on alert for fraudsters. In this article, we explore how to spot merchant credit card fraud and how to protect your business against it.

What Is Merchant Credit Card Fraud?

Merchant credit card fraud targets businesses that accept credit cards as a form of payment. It includes various deceptive practices where the fraudster uses stolen credit card information to make purchases. There are three broad categories in which these fraudulent activities take place. The table below provides a clear description of each:

Merchant Fraud CategoryExplanation
Card-not-present fraudFraudsters use stolen credit card information to shop online or make a purchase over the phone without having the card physically present
Card-present fraudCriminals use physical cards, which may be stolen or cloned, to make purchases. It also includes stealing credit card information from physical cards at ATMs or POS machines
Friendly fraudFraudulent customers dispute legitimate charges, requesting a chargeback because they claim the charges were unauthorized

Merchant credit card fraud could significantly affect the integrity of credit card transactions and lead to severe financial loss and legal consequences, potentially damaging a business’s reputation. 

How Does Merchant Credit Card Fraud Occur?

Merchant credit card fraud could occur in different ways, including:

  • Credit card data theft—Fraudsters steal a victim’s physical credit card or install a card skimmer at point-of-sale (POS) terminals to steal the card data. They may also obtain credit card information through data breaches and use the information gathered to make unauthorized purchases
  • Account takeover—In this scheme, fraudsters steal the login credentials from a customer’s online shopping account. Then they swap the original account owner’s details with theirs but reserve the stored credit card information and use it to shop 
  • Card testing fraud—This is the tactic fraudsters use when they want to test if the stolen card information works. They make multiple small purchases on websites to check if the card is functional. The small charges accumulate over time, resulting in significant chargebacks when the legitimate card owner discovers it
  • Synthetic fraud—Synthetic fraud is difficult to spot because it often seems legitimate. Fraudsters create false identities by using both fabricated and real information to build credit, then max out the credit line with no intention of repaying the debt
  • Triangulation fraud—This involves a fraudulent merchant who serves as the link between a legitimate merchant and an unsuspecting customer. The fraudster creates a fake online store to receive orders from customers, then uses stolen credit card information to order from a real seller, who then ships it to the customer. When a chargeback occurs, only the legitimate seller will be liable

Credit Card Merchant Scams—5 Tell-Tale Signs

Identifying the tell-tale signs of a fraudulent transaction can help you and your staff avoid fraudsters and the havoc they could wreak. These are five common tell-tale signs of credit card scams for merchants:

  1. Multiple shipping addresses for the same card
  2. Unusual, large orders
  3. Irregular orders shipped internationally
  4. Fake email addresses
  5. Suspicious customer behavior

Multiple Shipping Addresses for the Same Card

Initially, it may seem that a customer is buying gifts for friends and family. On closer inspection, you may notice that the recipient’s name is the same on all the big orders, but each order goes to a different address. This could be a sign that the customer is engaged in fraudulent activities.

Unusual Large Orders

An unusual order is different for every business, but it should be easy to spot. For example, if you typically sell high-ticket items every two months but suddenly get multiple orders of that high-ticket item from a customer in one month, you should closely inspect the orders. 

Irregular Orders Shipped Internationally

Unless your target market is customers outside your country, receiving orders from other locations should make you raise an eyebrow. If you’re receiving large orders from international customers, pay closer attention to the transaction—especially if the recipient pays with a U.S. credit card. 

Fake Email Addresses

If you notice something off about an email, it may not always be from a fraudster—it could be a mere mistake. For instance, a customer may omit one letter when typing out their email in the form. However, reject the transaction immediately if you spot a glaringly fake email like jdaaa-bo#$@microsoft.com.

Suspicious Customer Behavior

This tell-tale sign is helpful in spotting fraudulent in-store transactions since credit card fraudsters could also attempt to use a stolen credit card in person. Look out for customers acting suspiciously when paying with their cards. You may notice that they are:

  • Wearing a disguise or trying to hide their face
  • Showing signs of nervousness or anxiety
  • Trying to rush you or warning you about problems with their card before you request information
  • Buying items randomly, not caring about sizing or price

Are Merchants Responsible for Stolen Credit Cards?

If a customer shops with a stolen credit card, the liability is shared between the merchant and the card issuer. In case of card-not-present fraud, the merchant is held liable because it’s their responsibility to perform additional checks to verify the cardholder’s identity and transaction’s legitimacy. 

As a merchant, you may be liable for card-present fraud in-store if they use outdated swipe-only terminals. To reduce your liability, install a chip reader in-store and install a tool like Visa’s Verified or Mastercard SecureCode to put the liability for credit card fraud on the card issuer.

Fraudulent charges may incur chargebacks, and you may need to pay a chargeback fee to your payment processor. These fees typically amount to $20–$100 per chargeback.

How To Prevent Credit Card Fraud as a Merchant

Adopting certain prevention practices can help you sidestep fraudsters’ activities. Listed below are actions you can take to prevent credit card fraud:

  1. Use secure payment gateways—These are your frontline warriors, armed with encryption and security protocols to protect your transactions and keep your business data secure
  2. Continuously monitor your account for suspicious activity—Always look out for warning signs of fraud or anything unusual. For instance, you could receive multiple high-value purchases from a new or infrequent customer, or you may receive orders from countries where you’re unlikely to have a customer. Dig deep to ensure every transaction is legitimate, and never let your guard down. Frequently conduct account audits to spot weaknesses and fortify your fraud defenses 
  3. Set purchase limits—Stay fraud-safe by allowing yourself ample time to scrutinize transactions before they’re fully processed. Set a purchase limit to prevent large transactions from progressing unchecked. This will deter fraudsters from trying to sneak past you with a fraudulent purchase
  4. Train your employees—Help your staff know what merchant fraud looks like and how to tackle it when they spot it. Ensure they’re familiar with all the latest credit card fraud tactics so they can detect it before it progresses
  5. Set up a robust fraud prevention strategy—Implementing a fraud prevention strategy will help mitigate financial risks.
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