Ecommerce Credit Card Processing Risks

Merchant Warehouse |

December 7, 2010

Doing business primarily on the Internet, called ecommerce, has a number of built-in risks, even besides the obvious “card not present” situation. Therefore a merchant account for this kind of business will have a discount rate, transaction fees and other assessments that are enough to cover the additional risk for the account provider and financial institution.

Credit card transactions processed from a PC-based system, the way the overwhelming majority of ecommerce charges are completed, are vulnerable to breaches in security and other potentially harmful risk factors. These issues can become costly and even, at times, put a business in a disastrous situation. Initially, before implementing your ecommerce business with merchant accounts, it is wise to have working knowledge of the risks that are involved when accepting credit card payments. It is even more important to learn how to lessen the risks.

Know your Friends

Reputable merchant account providers always make themselves available, sometimes through account executives but usually through customer service departments, to help you with any concerns that you might have. They are there to help you gain the understanding necessary to accomplish hassle-free processing. They not only bring experience and expertise to the job, they are typically trained to understand how to deal with your situation no matter how technologically challenged you might be. Relax: They won’t just speak accounting jargon or “computerese” to you.

There are two main categories of risks involved in credit card processing that should be carefully studied and continuously observed. First, there are the fraudulent transactions, of course. Second, there are errors, inaccuracies or malfunctions on the part of the customer, merchant, merchant’s PC and/or the provider’s system. The last one is admittedly rare, but the others need the spotlight to shine brightly on them so you can learn to recognize and respond to them.

Fraud and Theft

All of the major credit cards have a three- or four-digit security code that is printed on the back (or, with American Express, the front). The purpose for this security code is to ensure that the customer that owns the card is in physical possession of that card at the time of the purchase. Another security measure that is used is called the Address Verification System (AVS). This system is designed to help verify the identity of customers to the credit card processing system when they attempt to make purchases. The system can check the numeric portions of the billing address that was provided by the customer and then make a comparison to the one that the card issuing company has on file. For instance, if the address that is being verified is 5500 Cedar St., Los Angeles, CA 91042, the AVS system checks “5500″ and “91042.” If the stored information matches what the cardholder provided, then the system will allow the card to clear the payment.

You can be defrauded in a number of ways with ecommerce transactions. No matter how checks and double-checks you do with card verification numbers, address verification or even phone contact with the potential customers, well-prepared fraud plans (especially “inside jobs”) are exceedingly difficult to defeat 100% of the time. However, a great number of fraud attempts are perpetrated by inexperienced crooks and can be prevented with the standard verification procedures your provider has put in place for you with the help of the card associations.

Even if you give no more thought to the solution than following the provider’s and association’s anti-fraud procedures, you will be fairly well covered against most fraud attempts. Giving more thought to fighting fraud, of course, will lessen your fraud losses. It is up to you to calculate if the investment in time and effort will result in sufficient savings to make it economically viable. Your merchant account provider’s customer service representatives are your first stop in your “higher education” in fraud prevention. You can also get important and effective help from your own research, the experience of business associates and, interestingly enough, the blogs and websites of former credit card thieves who are now telling the tales of their cybercrimes.

Human Error and Machine Malfunction

The main credit card processing errors that occur with ecommerce merchant accounts happen to be inaccurate transaction information and improper authorizations. Due to the payments being accepted online, from a mile or a continent away, the customer enters the information into the system instead of the card being swiped at a terminal. This can cause various errors and generate a high volume of faulty submissions. This is less likely to happen when the card is manually swiped, which is why ecommerce has higher risk-reduction costs.

Merchants need to be sure and double-check the accuracy of the payment card information to reduce the risk of potential chargebacks. Authorizations present another challenge. Transactions should not be forced through if authorizations fail and, although credit card processing companies offer them, voice authorizations should normally be avoided, as they don’t provide a record that can be called on for corroboration in a case of a chargeback. It is during the course of any of these “human involved” actions (phone verification, rechecking submitted card numbers, etc.) that a simple transposition of a number or misreading of a birth year can gum up the works.

You are Not Alone

Don’t sit in the dark and wonder what to do. Call your merchant account provider and talk to your customer service representative. You should make every effort to cultivate a relationship with one or more representatives, so that they can learn the particulars of your company operation and tailor services and security measured more precisely. You are not alone in this ecommerce business, as the account provider has every incentive for you to succeed. If you do well, they will do well also.

You can clearly see that ecommerce credit card payment processing requires somewhat closer attention than their face-to-face, retail merchant counterparts. However, by implementing the proper software and having accurate knowledge of the procedures required to reduce credit card processing risks, you can easily avoid some of the major errors that typically occur. Remember, credit card fraud is not just a problem for ecommerce, but a problem for millions of consumers and businesses as well. You’ve got a lot of company, which means you can also get a lot of help.