There is some risk on both sides of the merchant account equation. I can probably best explain this with a quick example.

Let’s say a business processes on average $10,000 per month and assuming that there isn’t any upper limit on transactions, this merchant decides to take the previous hundreds of credit card numbers he’s collected over the past several months and run them all for $1500. Assuming he has about 100 cards, he’ll have about $150,000 he could run within a very short period of time. If the merchant account service provider has no upper limit on this account based on previous underwriting and this merchant who runs the $1500 of transactions successfully on 100 cards does so with the intention of never delivering any product or service (i.e. fraudulent charges), the merchant account service provider is the one responsible for those transactions because I can guarantee all of those 100 people are going to want that $1500 back. If the $1500 from these 100 people was already deposited into the bank account of the fraudulent merchant and he’s transfered the funds into his bank account in Panama, it’s tough luck for the merchant account bank.

This is the risk… Now, what I’ve just described doesn’t happen very often. In fact, it happens very little, but for those that make the attempt, the rest of the honest business people suffer the process of having to go through a credit check and all the other limits.

There are several ways merchant service providers can detect fraud and some seem to err on the side of being a little cautious. If it weren’t that way and the merchant providers let slide more transactions like the one mentioned above, your rates would probably be significantly higher than they already are.

The risk on the part of the merchant exists as well, but in a different sense. Typically merchants who experience problems with risk do so because of chargebacks usually dealing with industries that may be more likely to have chargeback problems. “High Risk” merchant accounts fall into this category as well as some other categories such as consumer electronics, computer hardware / software, etc. What typically happens is that a charge goes through without problem and the products and services are delivered.

In the event that a chargeback occurs or a customer makes a claim that they never ordered a product or that the product was never delivered, a merchant will need to provide proof of delivery in the form of tracking IDs, preferably with signature confirmation. If you’re shipping a high priced item or anything more than what you’re willing to lose, you can transfer some of that risk by having a tracking ID from your carrier along with a signature confirmation of delivery.

In the event that you as the merchant can confirm receipt by the party involved, you are “off the hook” usually. However, keep in mind that Visa and Mastercard make a LOT of money from the balances of their cardholders and will often times side with them over you.

Both Visa and Mastercard have extensive guides on how to avoid chargebacks that if you’re experiencing anything higher than a 1% chargeback ratio, you should review these guides and make changes accordingly.

Some quick tips may include only delivering the product to the billing address. Usually if someone is committing fraud with a credit card that doesn’t belong to them, they will be having it shipped elsewhere.

You may also consider contacting the cardholder to verify the transaction. I’ve had instances myself when the transaction looked too good to be true and when I called the number provided, it was disconnected. I simply cancelled the transaction and obviously didn’t ship anything out.

Use common sense and do your due diligence when considering whether fraud may exist. There are some very advanced solutions and insurance on some transactions that will insure each transaction up to a specified limit. In this case, your transaction costs typically go up to a couple dollars per transaction and cause the buyer to input data that he or she may be completely uncomfortable providing, so this scenario really only works if you have a very unique product with a high dollar value catering to a market that isn’t overly concerned with providing extensive data about themselves, i.e. including drivers license numbers, etc.

So, that solution may not work for very many of you, but if you’re really serious about having your transactions insured, let me know and I’ll introduce you to the company that does this.

Aside from that, you can reduce your risk and the risk to the merchant account service provider by simply doing good business. That will keep your customers coming back anyway and reduce the expenses associated with fraud and risk.

by Brian