3 Credit Card Processing Scams Every Business Owner Needs to Know About

Updated on October 28th, 2020
Credit Card Processing Scams - Causes chargeback

Fraud remains a top concern for consumers and businesses alike—and the concern is warranted. According to the LexisNexis 2016 True Cost of Fraud study, every $1.00 of fraud costs U.S. merchants $2.40. Fraud losses totaled 1.47 percent in revenue in 2015, up from 0.51 percent in 2013. Behind these statistics are numerous credit card processing scams.

Although any business can fall victim to fraud, payment processing companies see a sizeable occurrence among small and medium sized businesses (SMBs). The impact of fraud can be much more significant for SMBs that don’t have the resources to handle the fallout. A loss of a couple hundred dollars a month has a much greater impact on an SMB than a major retailer.

Let’s look at the most common types of credit card processing scams and tips to avoid them.

Force Authorization Scam

When a customer’s card is declined, a merchant can perform a “force auth” to complete the transaction. A merchant typically conducts a force auth because they have already remitted goods or services and want to finalize the sale. To force a transaction, the merchant calls the cardholder’s issuing bank to obtain an authorization code to override the decline.

In a forced sale, any combination of digits forming the “code” will override the denial.  When a customer presents a card that is declined, they tell the clerk “this happens all the time” and instruct them to enter a combination of alpha numeric characters.

If the clerk enters the fake authorization code instead of calling the cardholder’s issuing bank to obtain a valid code, the transaction will go through. However, the merchant assumes all the risk. If the auth code is fraudulent, the merchant will not be able to file a dispute. They will also be subject to costly chargebacks and fines.

Credit Card Scammer Tip: Never enter a code given by a cardholder to force a transaction. Always allow the terminal to get an approval code.

Wire Scam

This type of scam occurs when a customer places an order that is typically much larger than what the merchant normally processes. They overpay for the order and tell the merchant to wire the excess funds to a third party.

For example, a customer places an order from Joe’s T-shirt Shop for $7,000 worth of merchandise. The customer pays $10,000 and request that the merchant wire the excess funds to a third party. This third party will handle product pickup and delivery. The “sale of a lifetime” costs the merchant $3,000 plus the fines and fees for conducting a fraudulent transaction.

Wire Scam Tip: Don’t accept money to be wired to anyone else for any reason.

Gift Card Credit Card Processing Scams

Gift card scams are as common as the cards themselves. TotalRetail reports national retailers lose $72,000 annually from gift card fraud. These scams include skimming card numbers to create counterfeit cards and returning stolen goods in exchange for gift cards. Store employees account for 13 percent of gift card fraud, usually from stealing preloaded cards.

Gift Card Scam Tip: Implement security measures to protect cards from theft and unauthorized use. Require a receipt and an ID for all returns.

In addition to the tips above, following  card acceptance best practices and applying common sense can help protect a business from falling victim to a card processing scam. If you are subject to such a scam, then refund the transaction immediately, do not give them the products or services, and contact your payment processor’s risk department for assistance.

Jim Roddy

Jim Roddy

Jim Roddy is a Small Business Advisor for Vantiv’s PaymentsEdge Advisory Services. Prior to joining Vantiv, he was President of B2B publisher Jameson Publishing for 11 years and launched his own startup. Jim is regularly requested to speak at small business conferences and he is author of the book Hire Like You Just Beat Cancer.

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