Ten Ways to Reduce
Chargebacks and Fraud
© Copyright 2002, Jim
Merchants' concern about online credit card fraud and
chargebacks is rising at a significant rate. According to
the 2001 Online Fraud Report conducted by Mindwave Research,
41 percent of merchants say the issue of online credit card
fraud is "very serious" to their business.
As e-commerce continues to flourish, the number of
instances of credit card fraud and chargebacks will continue
to mount. It should go without saying that the need to take
certain measures to reduce and virtually eliminate
chargebacks and fraud is certainly paramount.
Here are some ways you can greatly reduce the instances
of chargebacks and fraud, even potentially eliminate the
No. 10: Interactive Voice Response (IVR) Terminals
IVR Terminals, developed by VoiceStamps, are a relatively
new solution that greatly reduces chargebacks and fraud by
collecting a "voice stamp" or voice authorization
and verification from the customer before the merchant ships
the order. The voice recorded order verification is then
automatically e-mailed to the merchant for filing in the
event the customer tries to dispute the charge on their
No. 9: Collect CVC2 and CVV2 Verification Numbers
This tactic alone will not only reduce instances of
chargebacks by 26 percent, according to Visa, but also
reduce any pass-through fees that may be charged when a
credit card order is conducted. On the back of MasterCard,
most Visa and Discover credit cards is a three-digit
security code located right after the credit card number.
Requiring customers to give the three-digit code acts as an
additional verification measure.
American Express cards also have a similar security code
that is located on the front of the card right above the
cardholder's account number, which is usually four-digits
long. Most online payment processors support entering the
security codes when processing credit card orders. Check
with your payment gateway provider (i.e., Verisign,
Authorize.Net, ECHO Inc., etc.) for details.
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No. 8: Use Address Verification System (AVS)
AVS checks to ensure the address entered on the order form
matches the address to where the cardholder's billing
statements are mailed. People ordering products and/or
services using a stolen card number will never use the real
cardholder's billing address, so this is your chance to stop
the order before it's too late. AVS only works with orders
conducted in the US. Failure to use AVS when processing
credit card transactions will always result in paying higher
credit card processing fees.
No. 7: Scrutinize orders from developing foreign
A large percentage of fraudulent Internet purchases are made
from Indonesia, Russia and other eastern European or
developing countries. Accept orders from such countries at
your own risk until a worldwide AVS system is developed.
No. 6: Let customers know what name will appear on
Many merchants who use third-party processing companies have
run into problems because the company name that appears on
cardholder's monthly statements is usually the name of the
third-party processing company, and not the company name of
the site where the cardholder made their purchase.
This isn't always the case, but in many cases it is. If
you use a third-party processor, and even if you don't, make
sure the customer knows what name will appear on their
credit card statement at the end of the month. This will
help to reduce any confusion that might otherwise occur.
No. 5: Handle suspicious orders accordingly
If an order seems suspicious, the best way to handle the
situation is to either call or e-mail the customer and
attempt to verify that they placed the order. As a rule of
thumb, if in doubt, check things out. It may be a good idea
that if a customer makes an unusually large volume purchase
from your site to follow-up with a verification call. This
is where a system like IVR terminals, previously mentioned
above, can come in very handy.
No. 4: Watch out for orders using free e-mail
Be wary of accepting orders from people who used a free
e-mail address when ordering (i.e. Hotmail, Yahoo, etc.).
Tracking people who used a free e-mail address is almost
impossible. It's much easier for them to get away than if
they used their ISP or their company's e-mail domain. To
check whether an e- mail address is a freebie or not just
take the part of the address after the "@" symbol,
add "www" to the front of it and see what Web site
it brings up (i.e. firstname.lastname@example.org = www.yahoo.com).
No. 3: Signatures on delivery
If your business delivers products, use a carrier that
requires a signature on delivery and allows you to have a
copy of the signature. Retain these for your records.
No. 2: Request fax copies of ID and credit card
You may want to request your customer to fax a copy of both
sides of their credit card and driver's license. This tactic
usually works best in a business-to-business sales
environment. While this is not a defense under Visa or
MasterCard rules, it is yet another way to deter fraud.
No. 1: Posting a warning message
Taking the time to post a warning message on your order page
to those who may attempt to make a fraudulent order will
greatly deter the number of instances of fraud. Be sure to
mention that IP addresses are being logged. IP addresses can
come in handy when locating fraudulent orders.
Taking measures to deter and eliminate fraud and
chargebacks from occurring are a necessity in order to
operate a successful online business. Each day companies
dedicated to risk management are developing solutions to
provide merchants, like yourself, with extra protection
because of the financial burdens chargebacks and fraud can
bestow if ignored.
Jim Conley II is the CEO/Founder of
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