How to Reduce Credit Card Fraud

Credit card fraud can be curtailed through a variety of measures

The big daddy of 2005â¬"s many credit card heists was probably the CardSystems breach, which put as many as 40 million credit card numbers at risk. Thatâ¬"s one compromised credit card number for every 18 adults in the United States. So what exactly are merchants doing to prevent credit card fraud? Hereâ¬"s a snapshot from Sharper Image, the San Franciscoâ¬based retailer of high-end doodads, which earned revenue last year of $760 million.

1. The Chargeback

When a customer hands a credit card to a cashier, the credit card company usually assumes liability if the card turns out to be stolen. But with online and telephone transactionsâ¬dubbed "card-not-present" transactionsâ¬merchants assume this liability. If a cardholder disputes a charge, it comes back to bite the merchant in whatâ¬"s known as a chargeback. According to the Merchant Risk Council, a trade group, retailers that donâ¬"t manage credit card fraud can have chargeback percentages in the double-digits.

2. The Fraud File

As a longtime catalog retailer, Sharper Image has been compiling for the past 25 years a list of names, addresses and ZIP codes that have been associated with chargebacks. "It doesnâ¬"t mean that every address in that file is a fraud or a bad person," CSO Joe Williams says. "It means that there has been some fraud activity reported, one way or another, at that address. Someone at that address may have been a victim." This so-called fraud file, or negative list, is used to verify all card-not-present orders, both online and on the telephone.

3. The Attempt

After fraudsters obtain stolen credit card numbersâ¬which are now being sold online complete with the security codesâ¬theyâ¬"ll try to use them to purchase products for resale. At Sharper Image, crooks might place multiple orders for camcorders and other expensive products online, often opting for overnight delivery. Sometimes they try to evade fraud detection by calling not the toll-free number but a local store, where the person who answers the phone works on commission. They may even try to go through TDD operators who assist the hearing-impaired, thinking that those orders will escape notice. But every card-not-present order gets the same scrutiny because Sharper Imageâ¬"s goal is to limit all chargebacks.

4. The Match

Each night, all card-not-present orders are matched against the fraud file, which has hundreds of thousands of addresses. The system also looks for irregularities in the credit card information or mailing addresses that differ from billing addresses. "You have to do this cheaply, or you cut into your profits, and you have to do it quickly because customers do not want their orders delayed," Williams says.