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Credit card fraud is the unauthorized use of a credit card. While cardholders can often avoid financial liability for unauthorized transactions, it can incur significant costs for businesses, especially those that accept personal payments from older card readers. Liability for fraud depends on what safeguards are in place. In general:
Small Business Credit Card Fraud
On October 1, 2015, liability for fraudulent credit card transactions was transferred to companies not set up to accept EMV chip cards, which are more secure than magnetic stripe cards because a unique code is generated for each transaction. The shift also applies to retailers whose EMV chip cards are swiped rather than inserted into their EMV readers. Prior to this change, credit card issuers would be liable for theft of funds through unauthorized credit card use.
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Credit card fraud can affect a business in other ways, such as chargeback fees, network reviews and the potential loss of a merchant account. It may be impossible to completely eliminate credit card fraud, but there are steps that can be taken to manage the number of cases a business faces.
Merchants may be included in chargeback monitoring programs administered by payment networks such as MasterCard or Visa if their chargebacks exceed acceptable rates. Merchants participating in these programs suffer penalties and additional fees until their chargebacks reach acceptable levels.
MasterCard and Visa require merchants to participate in the following programs when their dispute reaches a certain level:
The transaction dispute ratio is calculated separately for each card network based only on the transactions processed on their network. Most card networks divide the number of disputes for the month by the number of transactions for the month. MasterCard divides the month’s dispute by the number of transactions in the previous month.
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Chargeback fees are additional fees charged by your payment processor to cover the costs of dispute processing and to encourage dispute avoidance if possible. Chargeback fees vary by payment processor. While you may get lucky with some processors and not have to pay a chargeback fee, you are more likely to be charged $15 or more per event.
Merchants who require a card network to participate in a dispute program are given some time to reduce their chargebacks. However, if a merchant cannot resolve the issue, their payment processor will be affected. Payment processors that offer merchant accounts, known as “acquirers,” may issue a non-compliance assessment when their merchants are in the dispute program.
“Visa and MasterCard cannot review individual merchants. They can only review their member banks,” said Gary Rutledge, chief operating officer of PaymentCloud and a former member of the MasterCard International Security Committee. However, he says these assessments are ultimately passed on to individual sellers through increased fees and penalties by the acquirer.
It’s important to understand where sellers’ chargebacks are coming from. They can do so by analyzing their credit card charges to identify patterns. Once it is clear how chargebacks occur, a strategy can be devised to reduce the number.
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“If the card is present, if the EMV chip is read and everything is happening as it should at the time of purchase,” Rutledge said, “then the liability for fraud shifts from the merchant to that credit card issuer.” Do not use chip cards, otherwise you may be liable for fraudulent transactions.
Online transactions, including e-commerce transactions, are less secure than in-person transactions. In general, publishers are liable for fraudulent online purchases, but you can still minimize the cost of chargebacks and fraud by using:
Card Security Verification: To verify whether the customer has the physical card, the card number and expiry date must be entered in addition to the three or four digit security code printed on the card.
Payer authentication programs: Use programs like Visa Secure and MasterCard Identity Check to direct the customer to an authentication screen that requires a password or code before processing the transaction.
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Address Verification System: Use your payment processor’s service to verify the cardholder’s address by comparing the billing address provided by the cardholder with the address on record at the issuing bank.
Rule-Based Transaction Filters: Set up rules and filters that can flag transactions as suspicious based on IP address, country, dollar amount, frequency, etc. This tool is usually offered for e-commerce transactions through merchant gateway providers
Delayed Order Shipments: Consider not shipping orders until cardholder information is verified. This can be especially useful when selling big tickets.
About the Author: Lisa Anthony is a small business writer with over 20 years of experience in banking and finance. Read more
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Business Lines of Credit: Compare the Best Options by Randa Chris Read More Small-Business Grants: Where to Get Free Money by Steve Nicastro, Randa Chris Read More When handled properly, credit card use in any business can save time spent on purchasing operations. Reduces and accumulates rewards and extends payment terms The convenience of ordering online or grabbing small items as needed makes a business credit card a must for many businesses. However, small businesses are vulnerable to certain types of fraud due to a lack of internal controls and limited personnel to supervise, and the use of credit cards can increase the risk.
According to the Association of Certified Fraud Examiners to the Nations 2020 Global Study on Occupational Fraud and Abuse report, small businesses face more fraud consequences.
Management must decide what risk they and their current or future investors can bear. Finding creative solutions to provide an overview is a prerequisite for reducing future losses.
Create a credit card policy. Establish, enforce and monitor credit card usage policies.
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Assign a credit card in an employee’s name. When a credit card statement comes with an unknown purchase, it is easy to identify the buyer.
Set spending limits. Setting a limit on how much an employee can spend without action from an administrator minimizes potential losses.
Limit the number of credit cards issued. The fewer credit cards floating around, the lower the risk of fraud or misuse.
Itemized receipts are required for each transaction. Do I buy paper boxes or a TV for my bedroom from the local supermarket? Itemized receipts also show taxes paid, which can be very important for any tax audit.
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Reconcile credit card statements monthly. Verify that receipts are submitted for each transaction that match statements to create accountability and checks to identify suspicious transactions.
Develop an approval process. Authorization (ideally before purchase, but better than nothing afterwards) shows cardholders that there is accountability and oversight and ensures that only necessary purchases are made.
Compare credit card purchases with expense reimbursement requests. A common strategy is to purchase something with a company’s credit card and then request a refund for the same purchase through an expense reimbursement request.
Policies and procedures for credit card controls and auditing should be tailored to business needs and risk appetite. Small businesses have limited resources and must weigh the cost of regulation against the benefits of implementation.
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CPA & Certified Fraud Examiner (CFE) SMB Accounting & Consulting, LLC | 321-775-3724| [email protected] | website
Shannon Bloom, a CPA and Certified Fraud Investigator (CFE), is the owner of SMB Accounting and Consulting, LLC. After leaving her role as a civilian accountant for the USAF, Shannon began helping local small businesses with government compliance for controllers/CFOs and contractors. Our editorial team and expert review board work together to provide informed, relevant content and unbiased analysis of the products we feature. Editorial content on our site is independent of affiliate partnerships and represents our unique and unbiased opinion. Learn more about our partners and how we make money.
Small businesses may not have many resources at their disposal to combat credit card fraud. But whether you have one employee or 100, card fraud can hurt you. Here are some ways you can reduce your risk.
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