Frequently asked questions
Cardholder-not-present transaction occurs when the transaction is made remotely, so that only the card’s details are needed, and a manual signature and card imprint are not required at the time of purchase. Such transactions include telephone sales and online transactions, and this type of fraud accounts for a high proportion of losses.
Merchants are the most affected party in a credit card fraud, particularly more in the card-not-present transactions, as they have to accept full liability for losses due to fraud. Whenever a legitimate cardholder disputes a credit card charge, the card-issuing bank will send a chargeback to the merchant (through the acquirer), reversing the credit for the transaction. In case, the merchant does not have any physical evidence (e.g. delivery signature) available to challenge the cardholder’s dispute, it is almost impossible to reverse the chargeback. Therefore, the merchant will have completely to absorb the cost of the fraudulent transaction. In fact, this cost consists of several components, which could add up to a significant amount. The cost of a fraudulent transaction consists of:
- Cost of goods sold: Since it is unlikely that the merchandise will be recovered in a case of fraud, the merchant will have to write off the value of goods involved in a fraudulent transaction. The impact of this loss will be highest for low-margin merchants.
- Shipping cost: Since the shipping cost is usually bundled in the value of the order, the merchant will also need to absorb the cost of shipping for goods sold in a fraudulent transaction. Furthermore, fraudsters typically request high-priority shipping for their orders to enable rapid completion of the fraud, resulting in high shipping costs.
- Card association fees: Visa and MasterCard have put in place strict programs that penalize merchants generating excessive chargebacks. Typically, if a merchant exceeds established chargeback rates for any three-month period (e.g. 1% of all transactions or 2.5% of the total dollar volume), the merchant could be penalized with a fee for every chargeback. In extreme cases, the merchant’s contract to accept cards could be terminated.
- Merchant bank fees: In addition to the penalties charged by card associations, the merchant has to pay an additional processing fee to the acquiring bank for every chargeback.
- Administrative cost: Every transaction that generates a chargeback requires significant administrative costs for the merchant. On average, each chargeback requires one to two hours to process. This is because processing a chargeback requires the merchant to receive and research the claim, contact the consumer, and respond to the acquiring bank or issuer with adequate documentation.
Loss of Reputation: Maintaining reputation and goodwill is very important for merchants as excessive chargebacks and fraud monitoring could both drive cardholders away from transacting business with a merchant.
- Hostile Fraud/deliberated fraud*
- Friendly Fraud*
- In addition, not fraud-related chargebacks like commercial disagreements, technical errors etc.
*guaranteed/protected by Clearsale
Some companies exist to prevent chargebacks, but not the fraud. These companies fight the chargeback once it already happened. In this case, the merchant will have the fraud cost (loss of the product, shipping costs etc.) but not the chargeback’s fees cost. Clearsale focus in preventing the root of the problem, virtually eliminating the need of the chargeback prevention or management companies.
In the end, merchants need to evaluate the cost of fraud prevention against the benefits. It is easy to fall into the trap of “turning on” all fraud prevention measures to ensure that nothing seeps through the cracks; however, there is such a thing as being too aggressive. Having a 0.00% chargeback ratio is not a desired outcome if you are turning away 10% of your good customers in the process. A balance needs to exist between what you are turning away and what you accept as valid. There can be as many as 40 false positives for every legitimate attempt at fraud (a 40:1 ratio), meaning that up to 97% of transactions flagged as high-risk can be legitimate transactions. These false positives result in card declines, significant sales loss, blocked accounts and overall poor customer experience.
ClearSale recommends pre-reservation. The ideal scenario is one where, when an order is received, the order amount is reserved in the payment means, avoiding losing the purchase due to lack of credit. In the meantime, the order will be analyzed for risk.
As soon as ClearSale issues an answer, the merchant may opt to complete the pre-reserve or cancel it. If the order is turned down, the reserve can be cancelled. This avoids unnecessary losses with the card operator. If the order is approved the reserve is released and the order safely delivered to the customer.
However, this is only our recommendation; we can handle several different scenarios.
We understand that sales volumes can vary dramatically on a daily basis, and are prepared to analyze all transactions with the same level of speed and accuracy, even if your store is suddenly handling a number of orders that is far above average. For example, if your store processes an average of 300 orders a day, but suddenly this numbers jumps to 1500, we will provide our services at the same speed and accuracy.
We offer plugins and guides for major platforms (Magento, Shopify, Prestashop and many others) that make integrating Clearsale's Solution simple in your CMS or E-commerce Platform. Or you can follow our API. Please check the Developers area of our website in order to get more information.
There are two possibilities here:
- Your company cancels any order it finds suspicious. This solves the fraud problem, but you are losing numerous safe purchases made by good customers who, for some reason, fit the risk profile or have made a small error during the transaction process. This can lead to the loss of a loyal future customer.
- Your company has yet to be discovered by fraudsters. This is just a question of time and market exposure. Once a merchant is protected from fraud, fraudsters migrate to other stores that offer an easier target.
The survival of a company that operates in the virtual world depends in part on minimizing its financial losses due to fraud, and on its ability to approve the largest number of orders in as short a time as possible. Therefore, a good anti-fraud service will include a thorough risk management system that ensures high rates of approved sales while minimizing chargebacks, all of this in as short a response time as possible. Companies that do not practice fraud risk management run the risk of turning down good orders because fraud is suspected, and delaying order approvals as they lack the analytical skills and resources required.
In card-not-present transactions, merchants are responsible for chargebacks, so they are required to bare the financial losses.
A chargeback occurs when a customer disputes a charge on his/her credit card bill. If the true owner of the card does not recognize the purchase, he or she will ask for their money back, by filing a complaint regarding a non-authorized transaction with the issuing bank. This is known as a chargeback.
In practice, the card administrator in the process of financial settlement between the parties debits the amount that would be transferred to the merchant.
Losses can extend far beyond the value of the goods lost due to fraudulent purchases. If fraud management is not properly handled, high levels of unauthorized purchases due to suspected fraud or lengthy analyses can lead to lost sales, loss of any marketing investment, an adverse effect on the merchant's image and, most importantly, lost customers.
Merchants may not realize that transactions can be declined for the smallest errors. This may lead to loss of immediate revenue from the purchase, or more importantly, loss of a future loyal customer. As data breaches and fraud rises, security restrictions are becoming tighter. The need for hands-on fraud management for every merchant is now vital.
Unlike purchases where the customer walks into the store and the clerk can ask for signatures, PIN numbers, and I.D., in purchases made online or by phone (card-not-present) there is no physical or visual contact between merchant and customer, facilitating fraud.
Here is how the process works:
A fraudster makes a purchase at an online store using someone else's credit card.
The acquirer (or issuing bank) checks if the card has enough balance and approves the purchase.
The transaction is completed and the goods delivered to the fraudster.
The actual cardholder does not recognize the purchase and asks for a chargeback.
The online store reimburses the cardholder and is left with a loss.
Fraudster activities range from using stolen, adulterated or cloned cards - in general using the data of upstanding citizens who are completely unaware that their credit card is being used inappropriately. Unauthorized purchases may also be considered fraud, such as when a child uses a parent's card, for example.