December 17, 2015
By Frederick Felman, CMO, Recurly
The holiday season is upon us and retail sales are already booming. In fact, after Black Friday and Thanksgiving weekend, retail sales reached $1.73 billion online —a 22 percent increase compared to the same period in 2014.
Sadly, some of these purchases, though kept, cherished and loved, won’t be paid for in 2016. Along with spikes in holiday shopping come spikes in credit card chargebacks. Some chargebacks stem from legitimate returns—the sweater that didn’t fit or the loved one who changed her mind about her wish list. But, other chargebacks are the result of fraudsters who take advantage of the high levels of online credit card purchase activity to defraud retailers.
Global losses due to fraud in 2014 reached $16.3 billion on total sales of $28.8 trillion, according to the Nilson Report. Furthermore, these figures only reflect losses from the unauthorized transactions—They don’t include the fees, interest and other penalties associated with chargebacks.
To add more coal to retailers’ stockings this year, experts also predict an increase in card-not-present (CNP) fraud as the introduction of new EMV cards makes card-present fraud more difficult. While EMV cards, because of their embedded microchip and associated security features, are more resistant to fraud at the point of sale, nefarious types shift their efforts to CNP fraud.
What can retailers do?
There are several strategies retailers can implement to keep credit card chargeback fraud from ruining the holiday season. [hide for=”!logged”]
Addressing Friendly Fraud
One best practice is to have as much customer information as possible readily available, including confirmation of both product purchase and delivery, making it harder to dispute receipt of goods.
For example, if you have proof that a customer received an order—like a confirmation delivery receipt—then you can better understand if this is a legitimate claim for a credit card chargeback.
“Warm lists” of customers who have claimed non-receipt of goods or damaged goods on multiple occasions is another useful strategy. In most cases, a customer who makes these kinds of claims more than once in a three-month period is not a profitable customer.
Unfortunately, merchants who don’t work to combat this type of “friendly fraud” simply encourage more of it and provide no incentives for banks to investigate such claims.
Dealing with Not-So-Friendly Fraud
In terms of fraud perpetrated by those who are not the legitimate credit card holder, there are a number of warning signs.
- Be wary of expedited shipping when billing and shipping addresses differ
- Make sure IP location and credit card address match up
- Always require the credit card’s security code
- Ship your orders using tracking numbers and require signatures
- Make sure your systems and services are PCI-compliant
- Consider using the services of a company that offers fraud-prevention technology and services
A best practice in these situations is to maintain “hot lists” of past offenders and check the lists before authorizing transactions via an automated call from your e-commerce engine. Include fields such as address, credit card number, phone number and email address; customer names are usually not helpful in hot lists due to commonality of names. A hot list can be invaluable in identifying individual fraudsters as well as rings of thieves who reuse credit cards, ship-to addresses and other information in their operations.
A transaction velocity filter is another valuable strategy. Fraudsters seek sites that are vulnerable to inadvertently processing many transactions from the same compromised card and the same IP address or multiple IP addresses. Applying a transaction velocity filter limits the number of transactions each hour. You’ll need to choose a rational threshold for your organization and be careful not to interrupt the flow of valid transactions to support legitimate business. An effective best practice is to put a workflow in place to flag this activity and follow up with both the affected customer and the credit card processor to make sure that the card and the orders are legitimate, rather than automatic blocking.
It’s important for retailers to work with partners and technology providers to ensure they protect themselves against fraud—particularly as it relates to holiday credit card chargeback. Fighting fraud is an ongoing battle for retailers and during the holidays, the stakes are even higher.
Fred Felman is the chief marketing officer for subscription-billing technology provider Recurly. Fred has served in marketing roles for high-tech businesses and brands for 25 years. Launched in 2009, Recurly provides sophisticated recurring payment management solutions for a retail industry moving increasingly to subscription-based models. [/hide]