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Types of Credit Card Fraud Part 1

The Advent of Credit Card Fraud

It should come as no surprise that on the flip side a new way to buy things is a new way to do so fraudulently. This is especially true when the new way to buy things involves new technology. If you wanted to buy something throughout history, you took whatever served as currency directly to the seller and exchanged it for whatever you were buying. The seller could see that it was, let’s say, Grunk the Hairless from two caves down that was bringing in a basket of polished mammoth teeth to exchange for one of your well-sharpened sticks, possibly the fancy deluxe version that sported stripes painted in berry juice down the shaft.

 

Even if you didn’t know who it was, you were physically present to receive the payment. It didn’t really matter if the person lied and claimed to be Grunk the Hairless. Nobody was being cheated out of anything, and even in the worst-case scenario, it would likely just cause confusion.

Caveman A: Hey, man. That’s Grunk the Hairless.

Caveman B: No, that’s Grunk the Hairless!

Caveman A: Are you sure?

Caveman B: Well, that’s what Blort the Stick Sharpener was told.

Caveman A: I don’t think Grunk’s hair is that long.

Caveman B: Now that you mention it, that is quite a bit of hair for somebody called “the Hairless”…

Caveman A: Right?

Caveman B: Hmmm…

Caveman A: Plus, Grunk’s a man.

Caveman B: What?

Caveman A: Grunk’s a dude, bro.

Caveman B: Yeah. So what?

Caveman A: Well, that’s a girl.

Caveman B: Really? How can you tell?

Caveman A: Uh, you do realize that we’re cavepeople, right?

Caveman B: Of course.

Caveman A: As cavepeople, all we wear are these little scraps of animal skin, right?

Caveman B: Yeah. I don’t know why we even bother, though. They don’t really cover mu…Ohhh!

Caveman A: Yeah.

Caveman B: Yeah…

While it may not have turned out exactly like that, transactions were direct and immediate, and generally remained that way for thousands of years. However, the use of credit cards, particularly for transactions when the merchant and the customer are not physically in the same place, means that any caveman or cavewoman can claim to be Grunk the Hairless and cheat Blort the Stick Sharpener out of a fancy new pointy-stick. It is important for merchants to be familiar with the types of fraud that are the most likely to occur and to stay informed about related changes and trends. If you are operating a business that is considered to be high risk, you may be in an industry that has a particularly high rate of fraud, to begin with, so the consequences could be even more severe.

 

Let’s take a look at the three general categories of credit card fraud that are currently most prevalent.

Friendly Fraud

The first type of credit card fraud is commonly referred to as “friendly fraud.” Generally speaking, friendly fraud is a situation in which a cardholder unintentionally commits fraud by disputing a purchase despite having actually authorized the purchase. Common causes of this are that the cardholder has forgotten that he made purchase or does not recognize it on the statement, the cardholder has forgotten about an automatic recurring payment that has a lengthy cycle, or a member of the cardholder’s family made the purchase without the cardholder’s knowledge.

The cardholder mistakenly believes that he has been charged for a purchase he did not approve. The fact that this was done unintentionally, without malicious intent, is behind the designation of this type of fraud as “friendly” fraud.

Preventing Friendly Fraud

Although friendly fraud is typically the result of an honest mistake, you still need to protect your business from the costs and other problems it can create. The following measures are a good place to begin.

Clear identification of the merchant on the credit card statement

In most cases, not recognizing a purchase listed on the billing statement is more likely to be due to an unclear description or identification of the merchant than to forgetting the purchase altogether. The merchant or credit card company may understand the jumble of letters and numbers, but it’s of no real help to most cardholders. Be sure that the descriptor used on statements is easy to interpret.

Prompt resolution of questions and disputes

Prompt and professional customer service can go a long way toward resolving issues that could otherwise turn into friendly fraud. If the customer feels good about the interaction with customer service, he or she will be more likely to accept the possibility that he or she has made a mistake. That usually means that the customer will be more cooperative in the investigation of the matter, allowing you to resolve it more quickly and to leave the customer with a positive impression.

Frequent—but not too frequent—contact

Establishing thorough records of transactions is extremely important for your internal operation, but creating a good paper trail can also help customers remember their purchases. This can be as simple as e-mailing an order confirmation, a shipping notification, and a follow-up message after the customer has received the items. In the case of recurring bills, a regular reminder can be sent. It may also be appropriate to send other information at times.

 

Use caution and restraint when doing so. Many businesses tend to let their enthusiasm (or inaccurate understanding of good marketing) drive them to send far too many e-mails to customers and potential customers. Spamming your customers is simply a good way to lose those customers. The balance can be difficult to achieve, but it is important. Ask your customers for feedback and make sure that they have easy, hassle-free control over the amount of e-mail you send them.

In Part 1, we have looked at some of the issues related to credit card fraud, as well as “friendly fraud.” In Part 2, we will examine the two other main types of credit card fraud: chargeback fraud and true fraud.

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