What is Credit Card Fraud?

May 26, 2022 by Irongate Payment Solutions

Credit card fraud has become an increasingly serious problem both for brick-and-mortar merchants and online retailers. According to the Credit Card Fraud 2021 Annual Report, 127 million Americans have experienced card fraud on at least one occasion. This represents almost 50% of the American adult population.

The report also found that nearly 40% of cardholders do not subscribe to email alerts or texts from their issuing bank or credit card company. As such, they are unlikely to learn about any payment fraud until fraudsters have racked up substantial charges on their card.

In this article, we’ll take a look at some credit card fraud prevention best practices that merchants should adopt and also discuss the types of card fraud they are most likely to encounter.

Credit Card Fraud Defined

The term “credit card fraud” refers to any type of unauthorized activity on a specific credit card. The card user does not own the card or have permission to use it. Credit card fraud also applies to cash advances.

Credit card fraud can involve a Visa, Mastercard, American Express, or Discover card from a US issuing bank. Thieves can also engage in payment fraud with a debit card.

Card fraud can also result from large-scale data breaches. Within the past decade, hackers have infiltrated numerous well-known retailers’ customer databases.

Online Transactions Fraud

eCommerce merchants often encounter card-not-present fraud. Because no credit card is provided, card authentication is more difficult. This type of fraud can be tricky to catch.

First, the scammer enters the stolen credit card numbers along with the card’s CVV code and expiration date. Then, the fraudster enters their shipping address and phone number. Without fraud detection in place, the merchant processes the order.

In-Store Credit Card Fraud  

Brick-and-mortar merchants can be affected by several types of fraudulent transactions. Business owners often have difficulty spotting fraudulent purchases.

Stolen credit card

Most credit card fraud results from a stolen credit card or a lost credit card. The fraudster typically enjoys an eCommerce shopping spree before the cardholder realizes their card is missing.

Counterfeit card

To produce a counterfeit card, a fraudster obtains cardholder information and produces a fake magnetic stripe card. The thief can easily use the card to make purchases or obtain cash advances.

Doctored or fake card

These two card transactions require the retail merchant to manually enter the credit card information. Therefore, the merchant should regard them as suspicious transactions.

A doctored card is a real credit card with a disabled magnetic stripe. When this card data has been deleted, fraudsters can revise the card details to match a valid card.

A scammer may create a fake card that doesn’t work at the store’s point of sale terminal. Therefore, the thief asks the merchant to manually enter the sale. This should trigger multiple red flags, and the merchant should suspect fraud.

Why Fraud Protection Is Important for Merchants

Each brick-and-mortar small business owner and eCommerce merchant should have card fraud protection. By engaging in fraud prevention and data security measures, the merchant is less likely to face three unpleasant outcomes.

Refunds From Fraudulent Sales

If a customer’s card was used in a fraudulent transaction, they will likely ask for a refund or account credit. This represents lost revenue for the merchant.

Potentially Damaging Chargebacks

Some customers will issue a credit card chargeback request instead of requesting a refund. A chargeback occurs when the cardholder disputes a credit card charge with the card issuer.

Some chargebacks result from actual credit card or debit card fraud. However, other customers file the chargeback request even for legitimate purchases.

Each chargeback impacts the merchant in three ways. First, they lose the transaction revenue. The merchant also loses the money they spent to purchase the item. To add insult to injury, the merchant’s credit card processor could assess a $20 to $50 chargeback fee (per incident).

Worse yet, merchants with too many chargebacks could be placed in a high-risk group. They will certainly see higher payment processing rates. In addition, the merchant’s payment processor could suspend or close their merchant account with little warning.

Damaged Retailer-Customer Relationship

Customers who fell victim to credit card fraud may be dissatisfied with their store experience. The retailer can take steps to repair the relationship, such as offering a gift or purchase discount. However, this tactic is not guaranteed to work.