7 Types of Credit Card Fraud & How To Protect Your Business

Accepting credit cards is necessary for most small businesses, but it also opens the door to fraud. When a fraudulent credit card transaction occurs, your business might lose the product and shipping costs and even be required to refund the purchase.

According to Statista, the value of fraudulent card transactions worldwide is expected to rise sharply, from $32.34 billion in 2021 to an estimated $43.47 billion by 2028. This underscores the growing need for businesses to take proactive measures against fraud.

What is Credit Card Fraud?

Credit card fraud occurs when someone uses another person's credit card or card information without permission to make purchases or steal funds. Fraudsters often get card details by hacking, phishing, skimming, or even using stolen physical cards. When these transactions happen, the legitimate cardholder often disputes the charge, leaving the business to handle the fallout.

For a small business, a fraudulent transaction can mean a chargeback fee (a reversal of the transaction), loss of the sale, and, worse, potential damage to your business's reputation. Even if it isn't your fault, customers are unlikely to shop again at the place where they were defrauded.

Types of Credit Card Fraud

1. Card-Present Fraud

A thief physically has the credit card and uses it to make in-store purchases before the cardholder reports it missing. Though less common than digital fraud, card-present fraud can cause significant financial and inventory loss.

2. Card-Not-Present (CNP) Fraud

CNP fraud occurs when someone uses stolen card details to make online purchases without having the physical card. CNP fraud is challenging to detect, and fraudsters often use bots to automate these attacks. Implementing multi-factor authentication (MFA) and requiring CVVs can add extra layers of security to help prevent CNP fraud.

3. Credit Card Skimming

Skimming involves a small device, or "skimmer," placed on card readers to capture credit card information. This typically happens at unsupervised terminals like gas stations or ATMs. While skimming doesn't immediately affect your business directly, it can harm your reputation if customers find a skimmer near or inside your location. To prevent skimming, regularly inspect your card readers for tampering and use tamper-evident devices when possible.

4.Account Takeover (ATO) Fraud

A criminal uses stolen credentials from phishing or breaches to log into a customer's account, make purchases, or access saved card details. Fraud prevention software can detect and block automated login attempts, which are a common sign of ATO fraud. Watching for unusual purchasing patterns, like a sudden large purchase or many small ones, can also help identify potential fraud.

5. Chargeback Fraud (Friendly Fraud)

Chargeback fraud happens when a legitimate cardholder disputes a charge, claiming it was unauthorized even if they made the purchase themselves. This can result in the loss of the product, transaction funds, and added chargeback fees. Excessive chargebacks can also lead to increased fees or even restrictions from payment processors. To reduce this risk, provide clear transaction details on customer statements and ensure your policies on returns and disputes are easy to understand.

6. New Credit Card Fraud (Identity Theft)

With identity theft, fraudsters open new credit card accounts using stolen personal information. The victim might only discover this fraud after noticing unauthorized purchases or a drop in their credit rating. Businesses can protect themselves by requiring customers to verify their identities during account creation and cross-referencing identity information with public records to detect inconsistencies.

7. Card Cracking Fraud

When fraudsters get partial credit card details, they may still lack the necessary information to make successful purchases. To complete the missing details, they often use bots in a technique called "card cracking" or BIN attack. This brute-force attack rapidly tries out various combinations of values to fill in the missing data on your payment system, aiming to crack the code for successful transactions.

The Impact of Credit Fraud on Small Businesses

Financial Loss: Businesses often bear the cost of chargebacks, including transaction fees, loss of inventory, and administrative costs.
Damaged Reputation: If customers perceive your business as unsafe for payments, they may take their business elsewhere, affecting sales and your customer base.
Increased Fees and Restrictions: Frequent chargebacks or fraud can lead payment processors to raise your transaction fees or, in some cases, refuse to process payments for your business altogether.
Operational Disruptions: Fraud cases require time and resources to resolve, from managing disputes to implementing new prevention methods. For a small business, these disruptions can strain resources and staff.

How to Detect Credit Card Fraud

Since much of credit card fraud is driven by automation, one of the most effective ways to identify it is by using fraud detection and prevention software. This software recognizes and blocks unauthorized automated requests by analyzing behavioral patterns and digital "fingerprints" left by these bots.

In addition, keep an eye out for unusual transaction activity, like a high number of small purchases or an unexpectedly large transaction. Monitoring your chargeback rate is also key—aim to keep chargebacks below 1% of your total transactions. If they exceed this level, it's likely time to enhance your credit card fraud protection strategy.

How to protect your business from credit card fraud?

Prevention requires a mix of best practices, tools, and a strong awareness of potential threats. Here are actionable steps to protect your business and customers:

a. Use Secure Payment Processors

Work with a reputable payment processor that offers built-in fraud detection, secure payment gateways, and data encryption. Many processors also provide two-factor authentication and tokenization, which replace sensitive card information with unique tokens that are useless if stolen.

b. Require Strong Customer Authentication

Encourage customers to create strong passwords and, if possible, implement two-factor authentication (2FA) for accounts on your website. 2FA requires customers to enter a code sent to their phone or email, making it harder for fraudsters to log in.

c. Monitor Transactions for Suspicious Activity

Look out for red flags like unusual order volumes, multiple orders using different cards but shipping to the same address, or sudden large purchases from new customers. Flagging these transactions and checking with the customer can prevent potential fraud.

d. Educate Your Staff

If you have employees, make sure they're aware of credit card fraud and train them on spotting warning signs. For in-person transactions, train staff to check for card features like holograms, expiration dates, and customer signatures.

e. Keep Your Website and Systems Secure

Ensure your website uses SSL encryption (indicated by HTTPS in the browser), as this secures the data transmitted between your site and your customers. Also, keep your software and security systems up to date to protect against known vulnerabilities that criminals exploit.

f. Use Address Verification System (AVS) and CVV Verification

When processing online transactions, require both the billing address and the Card Verification Value (CVV) code on the back of the card. AVS checks the address provided by the customer against the one on file with the card issuer, while the CVV adds an extra layer of security.

g. Use 3D Secure

The latest version of the 3D Secure (3DS) 2.0 protocol aims to prevent fraudulent credit card purchases online while minimizing additional steps for shoppers.

For instance, a first-time customer visiting your website and placing an order may need to verify their identity by either scanning their fingerprint on their phone or entering a code sent to their email. Returning customers using the same device may not need extra verification steps. However, the liability for authenticated one-time purchases could shift from your business to the card issuer.

h. Implement Chargeback Prevention Strategies

Respond promptly to any chargeback disputes and keep thorough records of all transactions, communications, and order details. Clear return policies and transparent terms can reduce chargeback risks and help defend your business if disputes arise.

To protect your business on all levels, platforms, and socials, consider getting Bitdefender Ultimate Small Business Security.

You will have the following:

Email Protection. Scans and blocks phishing emails, suspicious links, and fake invoices and prevents employees from accidentally clicking on malicious links.

Scam Detection. Scam Copilot monitors emails, texts, and chats for fraud. It alerts you and your employees when a scam attempt is detected, providing real-time guidance on how to handle it.

Password Management. Password Manager automatically generates strong, complex passwords that meet security best practices.

Secured Remote Work. The VPN protects your team from unsafe public Wi-Fi networks (like those in coffee shops or airports). Ensures all communication between remote employees and your business systems is fully secure.

Device Protection: Detects and blocks malware in real-time, including viruses, ransomware, and spyware on all laptops and smartphones.

Monitoring of Your Business's Digital Identity. Monitors your business's online presence for potential data leaks, unauthorized use of your business name, and exposure of sensitive information, even on the dark web, alerting you to any breaches.

Check out the plans here.

FAQs

Who pays when a credit card is used fraudulently?

In most cases, the cardholder is not liable for unauthorized charges, provided they report the fraud promptly. Credit card companies and banks often have policies that protect consumers from paying for fraudulent transactions. Instead, the financial institution usually covers the cost or works with the merchant to resolve the issue. However, businesses can sometimes absorb the losses for fraud if they didn't follow recommended security measures or if they are involved in a high volume of chargebacks.

What should I do if my business experiences credit card fraud?

First, notify your payment processor or bank so they can help investigate and secure your accounts. Next, review your security measures to identify potential vulnerabilities, such as weak authentication methods or outdated software, and strengthen them to prevent future incidents. You can report credit card fraud by contacting the Federal Trade Commission at 1-877-FTC-HELP, 1-877-ID-THEFT in the US and antitheft authorities in your country, especially if you notice a pattern of fraudulent activity.

What's the best way for a small business to protect itself from credit card fraud?

The most effective way for a small business to protect against credit card fraud is to invest in reliable fraud prevention software, which monitors transactions in real-time to flag or block suspicious activity. Implementing 3D Secure, a security protocol that requires customers to verify their identity during online transactions adds another strong layer of defense. Use multi-factor authentication (MFA), set transaction limits, and require CVV codes help further secure payments. Training employees to recognize fraud and regularly updating security practices help minimize risk.