Ten Ways to Reduce Chargebacks and Fraud

Every ISP is concerned about the possibility of credit card chargebacks and fraud, espcially those that sell webhosting services. Here are some ideas you can use to reduce the impact of crime on your bottom line.

by Jim Conley II Founder and CEO, MerchantSeek [March 13, 2002]

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 an order is confirmed. 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 account.

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 all MasterCard and 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.

No. 8: Use Address Verification System (AVS)
AVS checks to ensure the address entered on the order form matches the address where the cardholder's billing statements are mailed. People ordering products 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 U.S. 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 countries
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 statements
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 it can occur. If you use a third-party processor, and even if you don't, make sure the customer knows what company 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 to verify and order if, for example, a customer makes an unusually large or expensive purchase from your website. 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 addresses

Be wary of accepting orders from people who used a free e-mail address when ordering (i.e. Hotmail, Yahoo, etc.). It's almost impossible to track down someone who used a free e-mail address. If they left a payment record at an ISP or used a company domain, it will be easier to find them. To check whether an e-mail address is a freebie or not, most ISP owners know that you just need to take the part of the address after the "@" symbol, add "www" to the front of it and see what website it brings up (i.e. joe@yahoo.com = www.yahoo.com).

No. 3: Signatures on delivery
If your business delivers products, such as modems, 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 fraud and chargebacks is absolutely necessary in today's global economy. Each day, companies dedicated to risk management are developing solutions to provide businesses with extra protection. Take advantage of them. The cost of fraud and chargebacks will add up if the problem is ignored.

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