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Save Money by Eliminating Fraudulent Credit Card Orders

Posted on February 26, 2008

Author Matthew Ide

If you have an e-commerce business or are thinking of starting one, you will undoubtedly need to accept credit cards to get payment from your customers. And if you accept credit cards, chances are you have or will experience a financial loss from fraudulent credit card orders, credit card chargeback fees, and shipped products and / or services for which you won't receive payment. In 2007 alone, e-commerce businesses an estimated $3.6 billion in online revenues, simply due to fraud.

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Fortunately with today's technology, there are some simple steps you can take to reduce -maybe even eliminate - fraudulent credit card orders and save your business some big money.


You may want to use just some or all of the following methods to reduce or prevent fraudulent credit card orders, depending on your situation.

1. Understand that an approval on a credit card transaction does not mean the credit card is good.

I can't tell you how many times we have spoken to a merchant after a fraudulent order has occurred, and their response is "but I received an approval response, so it must be good!" Unfortunately this is not how it works. All an approval means is that the credit card number and expiration date is valid, and that the card has not been reported stolen. It is thus up to you, the business owner, to decide if the order is fraudulent or not. It is foundational you understand this before you can implement the other fraud prevention steps.

2. Use credit card AVS – Address Verification Service.

AVS is perhaps the easiest way to reduce fraudulent credit card orders. When you receive an approval on a credit card transaction, a code is also returned for an e-commerce or internet transaction telling you whether or not the card holder address matches, zip code matches, both match, or neither match. If address and zip code do not match, this is a big red flag. It should be noted that 75% of fraudulent transactions in the U.S. are AVS failures.

3. Use CVV2 / Card Code.

This is the 3 digit code on the back of a credit card, and is entered at the time of transaction. Like AVS, this is also checked against the cardholder's record, and a code is returned telling you if it matched or not. If it doesn't match, this could be another sign of fraud, since it's less likely a thief would have the correct CVV2 code.

4. Scrutinize foreign (non U.S.) orders more closely.

Depending on what you are selling and your market, anywhere from 10% - 60% of foreign orders are fraudulent. What can you do? Well one thing you can do is either reject all foreign orders, or accept them only from certain countries that have a good track record. European countries tend to have the lowest rates of foreign fraud, while countries from the former Soviet block, the middle east, and some African countries (esp. Nigeria) tend to have the highest fraud rates, in some cases approaching 80%. Another way to scrutinize foreign orders is to obtain the customers phone number and call them to verify, since thieves will rarely give out their actual phone number.

5. Consider Only Shipping to Billing Address.

Often times the thief will have the correct billing address, but want the item shipped to another address. If your item is high priced, it's good practice to only ship to the billing address on file.

6. Be wary of "free" email accounts such as yahoo, hotmail, etc.

Thieves don't like to be tracked, and will often use one of these free email address services. According to a recent fraud study, approximately 50% of fraud orders use free email addresses.

7. Review large orders.

If you receive an order that is several times the average order, say 3 times or more, it's a good idea to examine the order more closely for fraud. Almost all fraudulent orders tend to be larger than average. After all, the thief will try to get as much as he or she can out of you!

8. Use IP Fraud Prevention Tools.

There are several fraud services available that will check the IP address of the customer. They then compare this IP against certain IP addresses or IP blocks that are known to be fraudulent, and will also block excessive orders from the same IP. Authorize.Net is one of these services that offers IP fraud prevention tools.

9. Obtain the customer service number on the back of the card holders credit card.

When you take the order, ask for the credit card company customer service number listed on the back of the customer's credit card. If you find the order suspicious, you can then call the credit card company and verify the customer's information before fulfilling the order. This works especially well with verifying foreign credit card orders, and most foreign banks will speak English.

10. Get a faxed copy of the front and back of the customer's credit card.

This allows you to verify that the card is physically present in the customer's hands. In most cases a thief will not have the card.


Many of these fraud prevention tools and steps can be implemented through an e-commerce gateway. A good credit card processor or merchant account provider will offer these services, which will automate much of the process. You may also choose to manually review each order using the criteria listed above, or you may wish to do some combination of the two, where an automated review is done first, and then flags the suspicious orders for a manual review.

In any case, implementing at least some of these fraud prevention steps can save your e-commerce business hundreds if not thousands of dollars. Otherwise your e-commerce business is sure to get burned sooner or later by a fraudulent credit card order, and this can cost you much, much more, than any processing fees you may be paying.


About the Author

Matthew Ide is President of Merchant Express, LLC, a 10 year old credit card processing and e-commerce company.

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