Merchant Credit Card FraudCommon Warning Signs & Best Practices to Protect Your Business

December 5, 2023 | 15 min read

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Merchant Credit Card Fraud

In a Nutshell

Merchant credit card fraud isn't just a consumer issue; it's a serious threat to merchants, too. It’s also a growing problem, with losses projected to hit nearly $14 billion next year. Dive into our latest blog to explore why this trend continues to escalate and discover what steps you can take to protect your businesses against this ever-evolving threat.

Insider Tips & Information to Prevent Merchant Credit Card Fraud 

Credit card fraud is a well-known problem. That said, discussion of these attacks tends to focus on the impact of fraud on consumers, while downplaying the impact of merchant credit card fraud losses.

By 2024, we're looking at potential losses reaching a whopping $13.73 billion. As we’ll see later, though, the broader financial impact may be much greater than this.

This growing trend is a stark reminder that the battle against online fraud is far from over. What’s at the core of the problem, though? Why is it so hard to keep fraud under control, and what can merchants do to protect themselves? Let’s find out.

What is Merchant Credit Card Fraud Prevention?

Credit card fraud is a form of financial fraud that occurs in the context of credit card transactions. This type of fraud can severely impact the integrity of credit card transactions, leading to financial losses and potential damage to trust and reputation.

By extension, merchant credit card fraud prevention refers to the strategies and measures implemented to protect against fraudulent activities. This includes a range of practices like using secure payment gateways, implementing strong verification processes for transactions, regularly monitoring transaction patterns for anomalies, and educating both merchants and customers about safe payment practices. 

The goal of fraud prevention is to create a secure transaction environment. This will benefit all parties, safeguarding both the merchant's and customers' interests.

Effective fraud prevention methods help maintain the trustworthiness of the merchant. They also help ensure the security of financial transactions. This plays a crucial role in minimizing the risk and impact of credit card fraud in the merchant context.

Common Credit Card Fraud Attack Methods

So, how does merchant credit card fraud happen? Let’s run down a few of the most common examples to help clarify what we’re talking about:

Stolen Card Data

One of the most straightforward forms of credit card fraud involves the use of stolen or cloned credit card information. Fraudsters acquire card details through data breaches, phishing, or skimming devices, and then use this information to make unauthorized purchases.

Account Takeover

Account takeover occurs when a fraudster gains access to a customer's online shopping account, usually by stealing login credentials. They can then make purchases using the stored credit card information or change the account details to lock out the legitimate user. 

Triangulation Fraud

Triangulation fraud involves three parties — the customer, a legitimate merchant, and a fraudulent merchant. Here, a scammer sets up a fake storefront. When customers purchase from this site, the fraudster uses their information to buy goods from a legitimate site and ship them to the customer.

Card Testing Fraud

Card testing is a tactic used by fraudsters to test the validity of stolen card data. They make small transactions on different websites to see if the card is active. These small transactions may not raise immediate alarms, but they accumulate over time, meaning significant costs in terms of transaction fees and chargebacks.

Synthetic Fraud

This involves the creation of a fake identity using a combination of real and fabricated information. The fraudster builds credit under this identity and then maxes out the credit line without any intention of repayment. Detecting synthetic identity fraud is challenging as it often appears legitimate at first glance.

Interception Fraud

Interception fraud happens when a fraudster manages to intercept the delivery of a product. This can be done by changing the delivery address after the transaction, or even physically intercepting the package (i.e. porch piracy). It results in losses for both the customer and the merchant.

This list is by no means exhaustive. There are literally dozens of tactics fraudsters use to gain access to and use credit cards illegally. For a more in-depth exploration of the various types of fraud and the methods cybercriminals use, check out our main article on eCommerce fraud:

Learn more about eCommerce fraud

Why are Merchants Held Liable for Fraud?

When it comes to credit card fraud, you might wonder why you, as a merchant, would end up bearing the brunt of the liability.

You’re entrusted with the responsibility of conducting due diligence in each transaction. This means you must have systems and processes in place to detect and prevent fraudulent activities. When a customer makes a credit card purchase, you have to verify the legitimacy of the transaction. This verification process includes checking the card details, verifying the cardholder's identity, and ensuring that the transaction doesn't raise any red flags indicative of fraud.

If you process a sale, but it turns out to be a fraudulent transaction, the bank will have viewed you as having failed in this responsibility. This failure is not just a lapse in security measures. It’s also a breach of the trust placed in them by the credit card networks and the customers.

Financial Implications

When a fraudulent transaction occurs, someone has to absorb the loss. In the credit card industry, this loss typically falls on the party that is deemed to have the greatest ability to prevent the fraud in the first place. More often than not, this is the merchant. Credit card companies and banks argue that you are in the best position to verify the authenticity of the transactions at the point of sale.

Merchant Agreement Stipulations

The agreements you sign with credit card processors and banks often include clauses that hold you liable for transactions processed. These agreements stipulate the security measures and verification processes that you must adhere to. Failure to comply with these standards, resulting in fraudulent transactions, leads to you bearing the liability for the incident.

Encourage Robust Practices

This liability is also a way to encourage you to invest in robust fraud prevention and detection systems. By holding you liable for merchant credit card fraud, banks provide a clear incentive to implement the latest security technologies and practices, thus reducing overall incidences of credit card fraud and producing benefits for everyone in the process (at least in theory).

The average merchant will lose $3.75 for every $1 of fraud this year. Take action now before it’s too late.REQUEST A DEMO

Generally speaking, your liability in cases of credit card fraud is tied to your role and responsibility in the transaction process. The system is designed to uphold the integrity of credit card transactions by ensuring that all parties involved take proactive steps to prevent fraud.

Impact of Credit Card Fraud on Merchants

Frankly, when a card isn’t present to verify, it’s a lot more difficult to authenticate your buyer. Therein lies the problem; this is the reason why card-not-present fraud now accounts for almost 75% of all fraudulent credit card transactions

The sad truth is that, for every dollar lost to fraud, merchants actually lose $3.75 when accounting for lost merchandise, added fees, and other ancillary costs. If we look at merchant credit card fraud in this context, the $13.73 billion mentioned in the introduction are actually just a fraction of the total costs.

As if this weren’t bad enough, around 48% of consumers say it’s your responsibility to protect them from fraud. When a customer disputes a fraudulent transaction (known as a chargeback), the bank refunds the customer and then seeks reimbursement from the merchant. The rationale is that, if the merchant had taken adequate steps to verify the transaction, the chargeback might have been prevented. 

There’s also the threat posed by first-party (or “friendly”) fraud. Friendly fraud occurs when a customer makes an online purchase and then disputes the charge with their bank instead of seeking a refund from the merchant. The motives can vary from malicious intent to simple misunderstandings, but it results in the merchant losing both the goods sold and the sales revenue. This problem alone may cost merchants over $100 billion every year

Merchant Credit Card Red Flags

Now that we have a better understanding of just how bad merchant credit card fraud actually is, let’s talk about the next most important detail: what to watch out for.

Here are a few warning signs that a transaction might be fraudulent:

One of the simplest signs of potential fraud is a mismatch between billing and shipping addresses. While there are legitimate reasons for these addresses to differ (such as sending a gift), it’s often a tactic used by fraudsters. Additionally, pay attention to transactions where the address provided does not match the one linked to the card.

A sudden spike in the number or frequency of purchases, especially if they are clustered within a short time frame, is a red flag. Fraudsters often try to use stolen card details as much as possible before they get blocked. So, a series of rapid-fire transactions, particularly from the same card or IP address, should raise an eyebrow.

Significantly large transactions, especially those that are not in line with the usual purchase patterns of your business, can be a sign of credit card fraud. This is particularly suspicious if the customer is new or if multiple high-value transactions are attempted in quick succession.

It’s a good thing to attract new customers. That said, a first-time customer making a very high-value purchase should warrant additional scrutiny. Fraudsters often use stolen credit card details on websites where they haven't previously made any transactions so as to avoid raising other red flags.

It would be odd for multiple cardholders, with totally different addresses and card information, to submit orders with the same IP address. So, if multiple transactions are being made from the same IP address but with different credit cards, this can suggest that someone is using multiple stolen cards.

These are just a few examples. There are literally dozens of fraud red flags to watch for; click below to check out our main article where we outline some of the most common signs of a threat:

Learn more about fraud red flags

Keeping an eye out for these red flags can help you protect your business against merchant credit card fraud. The key is to have a system in place to review and verify transactions, especially those that raise these red flags, to minimize the risk of fraud and the associated financial losses.

12 Merchant Credit Card Fraud Prevention Best Practices

You don’t have to take merchant credit card fraud lying down. Instead, you can adopt a variety of strategies and technologies designed to detect and deter fraudulent activities across the board. 

Here are a few best practices that you can implement today to limit exposure to fraud:

#1 Use Secure Payment Gateways

Think of secure payment gateways as the frontline warriors in your fight against fraud. These aren't just any systems; they're your digital sentinels, armed with top-tier encryption and security protocols. A secure gateway ensures that every transaction is protected, keeping your customers' data safe and sound.

#2 Implement EMV Chip Technology

For brick-and-mortar stores, embracing EMV chip technology is like having an unbreakable shield. These chips are a tough nut to crack for fraudsters, making cloned or counterfeit cards almost a thing of the past compared to the old magnetic stripe cards.

#3 Monitor for Suspicious Activity

Keep your eyes peeled for anything out of the ordinary. Is a new customer buying a truckload of goods all of a sudden? Is there suddenly a surge of orders flying in from the other side of the world? These could be telltale signs that someone is up to no good.

#4 Machine Learning Software

Machine learning technology isn’t just “smart,” in the same way as a Smart TV. Rather, it's like having a digital Sherlock Holmes in your corner. ML technology sniffs out the unusual patterns and anomalies in transactions that might slip past a human eye, using algorithms that learn and adapt.

#5 Employee Training

Your staff can be your strongest asset in the fight against fraud. Train them not just to spot the signs of fraud, but also to understand the what, why, and how of handling these situations. Knowledge is power, after all. So ensure that your staff are well-versed in identifying suspicious activity.

#6 Maintain PCI Compliance

Sticking to PCI-DSS standards isn’t just about following rules; it's about maintaining a gold standard in how you handle credit card information. PCI compliance shows your customers that you value their security as much as they do. It stops cyber threats, and also instills confidence in your brand.

#7 Use Two-Factor Authentication (2FA)

Two-factor authentication adds an extra layer of identity verification to online transactions. It’s almost like a double-check at the door, ensuring the person making the purchase is the real deal. It won’t “stop” fraud entirely, but it can provide an extra layer of verification to make the scammer’s job harder.

#8 Set Purchase Limits

Sometimes, the best way to stop a big problem is to prevent big transactions from progressing without proper checks in place. Setting limits could deter those trying to make a quick payday by conducting a large, one-off fraudulent purchase and then disappearing.

#9 Regularly Update Security Systems

Technology is always moving forward. That means that, in the digital world, staying still is basically the same as moving backward. You need to keep your security systems in step with the times. Be ready to face new threats as they come, and detect and adapt to new challenges in real time.

#10 Secure Website & Networks

Are you sure that your platform is protected from every angle? Do your best to fortify your digital domain with firewalls, SSL certificates, and robust cybersecurity measures. Think of it as like building a digital moat around your business; make an attack from any angle impossible.

#11 Transparent Communication with Customers

Encourage a two-way street of communication. Educate your customers on safe shopping practices and let them know they should speak up if something seems amiss. Another important part of this is being responsive to customer inquiries, and answering messages and emails in a timely manner.

#12 Review and Audit

Don’t just assume your defenses are strong. Subject them to pressure to try and break through. Conduct regular check-ups of your fraud prevention strategies and subject your site to occasional mock “attacks.” This will help keep your defenses not just strong, but smart and responsive to new challenges.

The Key to Merchant Credit Card Fraud Prevention

Even the most well-crafted strategy, equipped with the best tools and techniques, cannot entirely eliminate the risk of fraud or chargebacks. Fraudsters are continually evolving their methods, and keeping abreast of the latest scams can feel like a daunting, never-ending task.

Chargebacks911® stands at the forefront of chargeback management, offering the most comprehensive services and products available today. Our team is dedicated to staying one step ahead, constantly identifying new fraud threats and crafting cutting-edge strategies and technologies to combat them. This proactive approach isn’t just limited to preventing fraud; it extends to tackling even the most challenging issues like friendly fraud.

No matter your chargeback prevention needs, we’re here to assist. Get in touch with us for a free demonstration and see how we can help safeguard your business.


Is merchant responsible for credit card fraud?

Yes, generally. A merchant may be held responsible for credit card fraud if they fail to follow proper security procedures or verify the legitimacy of a transaction. However, liability can vary based on the specific circumstances and the policies of the credit card company and payment processors.

How do I report a suspected credit card fraud as a merchant?

You can report suspected credit card fraud by immediately contacting the card issuer (i.e. the bank) and providing all the relevant transaction information. The bank will advise you on which steps to take next and help you determine if any other actions are required.

What happens to the merchant when you dispute a charge?

When you dispute a charge, the merchant will be notified of the dispute by their acquiring bank. Their bank will ask them to provide their side of the transaction, including sales receipts, tracking information, and/or any conversations you might have had with the merchant. Depending on the validity of the proof they are able to provide, either you or the merchant may be held responsible for the original transaction amount.

How often do merchants win chargeback disputes?

According to the 2023 Chargeback Field Report, the average merchant will win 52% of the chargebacks to which they submit a response. However, that figure is just a subset of all chargebacks; it doesn't include all the disputes they're not fighting. On average, fewer than one in five chargebacks filed are won by the merchant.

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