How entrepreneurs can protect themselves against fraud
As entrepreneurs, we’re equal parts executive and consumer. We have to navigate both sides of the proverbial register, and that dichotomy is particularly important to understand as it relates to payments fraud.
Identity fraud increased in 2012, according to data from Javelin Strategy & Research, affecting 12.6 million consumers and leading to $20.9 billion in losses. Driven primarily by significant increases in new account fraud and account takeover fraud, the rising prevalence of unauthorized transactions is especially problematic for small business owners simply because we are exposed to fraud more often than the average person. We’re all selling something and may therefore need to process payments in addition to buying things on the behalf of our companies as well as our families.
The good news is that as consumers we’re pretty much insulated from harm resulting from someone getting ahold of our plastic – whether a credit card or debit card – and racking up a bunch of charges. That’s because Visa, MasterCard, Discover, and American Express ensure $0 liability for most types of transactions, according to CardHub’s 2013 Consumer Fraud Liability Study. All credit card purchases are covered, as are debit card purchases “verified” by signature. Discover also extends its policy to PIN debit card transactions.
As a result, the median fraud victim incurred $0 in losses in 2012, according to Javelin data, despite the average consumer cost being $365.
The bad news is that financial institutions and merchants are left to eat the losses, with merchants typically shouldering around 40 percent of the burden. Consumer payments fraud isn’t the only impropriety that business owners have to worry about either. Sixty-one percent of the organizations that the Association for Financial Professionals surveyed for a 2013 report on business-to-business payment fraud had experienced fraud or attempted fraud in 2012, with the median loss being $20,300.
The question is therefore how to protect yourself from fraud both personally and professionally. There are a number of best practices that you can employ for each purpose.
Avoiding fraud as a consumer
- Make a credit card your primary spending vehicle: Credit cards provide blanket liability coverage for unauthorized transactions and make fraud relatively easy to deal with since you aren’t required to pay out of pocket until the end of the month.
- Sign for debit card purchases: Card network liability policies are better for debit card transactions that are “verified” by signature rather than PIN. By establishing a pattern of signature purchases, you’ll also be more likely to win a dispute over an unauthorized PIN transaction since it would be outside your normal usage patterns.
- Protect your personal information: From shredding sensitive documents before throwing them out to minding your P’s & Q’s on the Internet to making sure your mail doesn’t get stolen while you’re on vacation, there are plenty of ways in which everyday habits can mitigate your fraud susceptibility.
- Make a credit card your primary spending vehicle: As mentioned above, credit cards offer superior fraud protections as well as logistical benefits.
- Adhere to card network requirements: Common sense is always the best defense to payments fraud. For example, if your company has a retail location, make sure the cashiers inspect patrons’ credit cards to verify the presence of an embossed name, account number, expiration date, CVV number, and other security features. They should also compare a customer’s signature on the receipt to that on the back of the card. Such practices will shield your business from fraud liability.
- Require additional info for phone and online orders: Simply requesting the three digit security code on the back of a customer’s credit card for all card-not-present transactions will significantly decrease the chances of a fraudulent charge being approved. Major card networks like Visa also offer for-pay services designed to shield merchants from payments fraud liability. In addition, companies like Braintree can help you process payment according to PCI standards without having to do any of the work.
- Compare payment processing: A variety of sophisticated companies have entered the payment processing space in recent years, so make sure to shop around for a deal that meets your budget and fraud prevention needs.