Credit card fraud and chargbacks are a number one nuisance and detractor from "monetizing IP communications." The FBI's Financial Report to the Public for 2007 report losses of $52.6 billion, affecting 9.91 million Americans alone. (Quoting Redif)
According to a recent survey of 112 DIDX members (wired and wireless carriers and mashups) 39% said that online credit card fraud is a major obstacle to realizing their financial potential.
What is a chargeback? Basically, it's when one of those lovely purchases of your service have been made and then BOOM! The transaction is reversed. Rather than money being added to your account, it is deducted. Someone is monetizing your IP communications.
Why do they occur? Accidental double-charging, bank errors, customer disputes, or it's the way people go shopping 24/7 and never planning to pay a dime. There are websites, forums and lists dedicated to that last one. "Oh, buy it, we can just charge it back."
The problem is that when you as a merchant have too high a percentage of chargebacks, your merchant account id placed on the Visa/MasterCard Terminated Merchant File (TMF/MATCH list). All Merchant Account Providers review this list regularly.Ways to reduce the number of chargebacks and amount of fraud:
1. Consider offering alternatives such as Moneybooker, "your wallet for the Internet, to shop and send money worldwide."
They claim no chargeback risk. Our company and I do use them and there have been no chargebacks. They state that Moneybookers is hard currency and non-reversible. Check out their policy.
2. If the customer is face to face with you, great! Examine the card and ask for additional ID.
Look at the expiration date and make sure it is signed. Compare the signature to that on their passport or driver's license. if the customer hasn't signed, you can request that the customer signs the card. If the customer refuses, you can decline to accept the credit card. But most of us are selling a service over the Internet.
3. Verify the Verification Numbers
Many sources on the Internet say this reduces chargebacks by 26%, according to Visa AND any pass-through fees that may be charged when a credit card transaction is made. On the back of most MasterCard, Visa and Discover cards is a 3-digit security code located right after your credit card number. American Express cards have a security code on the front of the card right above the account number, usually 4-digits long. I'm not the finance expert, but I would suggest studying the law in your country to find out the restrictions on keeping a record of the security code.
4. 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. On the other hand, if your client makes all his or her purchases for SERVICES online with the purpose of using his or her own credit card and giving his correct billing address , but with a plan to always charge back (and to say that they did not authorize the charge), that's all our tough luck. AVS only works with orders conducted in the US. I'm not sure about those outside. Would love some comments from experts.
5. Automate fraud blocking in your billing software.
Develop in your billing software a method of adding domain names, IP addresses and so on where you have experienced chargebacks from customers, so that you can automate blocking of future purchases from them. You are logging your customer's' IP addresses aren't you?
I disagree with people who say that a large percentage of chargebacks occur in developing countries. From my experience over the past 10 years, fraud occurs in the richest to poorest countries, homes, and businesses. Don't become xenophobic or ethnocentric.
6. Let customers know the name that will appear on statements.
Customers might have signed up for your "Everything over IP" service, and do not recognize your company name that will appear on their monthly credit card statements. Inform them now, so they will not accidentally charge back.
7. Watch out for orders using free and anonymous type e-mail addresses.
Beware of the Jabberwocky... sorry, my past of teaching English and listening to too much Garrison Keillor is sneaking in here... of accepting orders from people who use a free or anonymous e-mail address when ordering. Tracking people who use these is difficult. It's easier for them to get away with their credit card fraud, than if they used their Internet Service Provider (ISP) or their own company web site e-mail address. To check if 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 website it brings up.
8. Signatures on delivery of a service purchase which is what most of us sell in the IP communications industry.
If your business delivers products, you can get a signature on delivery. Keep these for your records. If you sell services, consider Verified by Visa.
9. Request clear copies of ID, credit card front and back, and credit card statement.
While if you require these, it does not mean that Visa or MasterCard will judge in your favor, it is yet another way to deter fraud. If I am about to buy a service over the Internet with the intent to charge it back later or with the intent in the first place of using someone's credit card fraudulently, and I am asked to supply this documentation, I am very likely to stop the purchase... or I will complain loudly.
10. Post your company's stance in your terms and conditions URL and anywhere else appropriate in regards to your fraud prevention methods.
Consult with a lawyer who has experience in online transactions. (I see a real need for a telecommunications law channel on TMCNET.) Look at how other companies in your industry do this to get ideas.
Monetize your IP communications. Don't let chargebacks stop you.