Ferreting Out Fraudulent Credit-Card Claims

Reduce chargebacks by identifying key risk factors Here’s a staggering statistic: Worldwide credit-card fraud losses for 1999 alone totaled $1.9 billion, according to London-based Meridian Research.

Marketers that sell apparel, jewelry, and computer products – high-ticket items that can be resold – are most at risk. Yet no company is immune, especially those, like catalogers and online merchants, that sell goods in card-not-present transactions.

Credit-card fraud in turn is the major cause of chargebacks – charges made by your bank against your merchant account, or more simply, credit-card charges that the card company will not pay for. Matt Cookson, spokesperson for Merrimack, NH-based computer products marketer PC Connection, says it’s not uncommon for computer catalogers to have chargebacks in the 6%-8% range.

Fortunately, you can implement procedures and standards to help reduce chargebacks and credit-card fraud. For instance, John Pitzen, general manager at Fullerton, CA-based gifts cataloger Wine Country Gift Baskets, suggests training order-takers to alert a supervisor if a transaction’s dollar figure appears suspiciously high based on average-order figures. Service reps should also look out for ship-to addresses with zip codes in high-crime areas, he says.

Boca Raton, FL-based The Mark Group, which mails the Boston Proper and Mark, Fore & Strike apparel catalogs and the Charles Keath gifts book, added stringent fraud controls to its payment processing systems in 1998. Enhancements included real-time credit card authorization, says operations manager Scott Bryant.

And in September, syndicated jewelry cataloger Seta Corp., which produces the Palm Beach Jewelry catalog, upgraded to parcel carrier Federal Express – which requires a customer’s signature upon delivery – for orders of more than $500, says controller Gary Flaks.

High-tech help This past fall, Seta also installed fraud protection software eFalcon, with the help of its Dallas-based payment processor, Paymentech. EFalcon, from San Diego-based HNC Software, uses a neural network system to score and assign risk levels to transactions.

Other fraud detection software tool providers include Houston-based TeleCheck and Mountain View, CA-based Cybersource. These programs basically create models from customer transaction histories downloaded from the cataloger’s database. The model then detects possible fraudulent claims within parameters set by the cataloger.

For example, a fraud system might automatically flag orders made after midnight (a high-risk fraud time), but the software would let you disable this flag if you know your customers are night owls.

Larry Bouchard, group manager for product management at Paymentech, provides other fraud protection tips:

* Always request the cardholder’s billing address, and compare the ship-to and bill-to addresses. A difference could indicate a stolen credit-card number (though it could also indicate a purchase being sent as a gift).

* Use – or have your credit card processor use – address and card validation tools and services such as the Address Verification System (AVS) and Customer Verification Value (CVV2) from Visa or Card Validation Code (CVC2) from Mastercard.

* Request the four-digit card identification number from American Express card users. This number appears in small print on the actual credit card – but not on receipts – indicating that the customer has the card and not just the account number.

* Build and maintain files of fraudulent names and credit card numbers.

* Set system alerts to flag duplicate transactions.

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