No Hiding the Truth: SMB Merchants Increasingly a Target of Fraud

It's estimated that small and medium-sized businesses (SMBs) lose upwards of $66,000 annually through fraud. An increased awareness of fraud among large merchants has forced fraudsters — those individuals who perpetrate crimes against retailers — to switch their attention to small businesses that provide an easier target because of the lack of safeguards they have in place.

According to a 2011 report from CyberSource and the Merchant Risk Council, more than 1 percent of all online transactions are at risk of being fraudulent. While online fraud rates have held steady, there's more at risk today as an increasing number of transactions move online from other channels.

Suffering a rash of fraudulent orders also damages a brand's reputation, as consumers will begin to shy away from any interaction with that merchant just as they would if the merchant had suffered a data breach of personal or credit card information. Then there's the loss of inventory, which has been packaged and shipped before the merchant has recognized the order was fraudulent.

All of these factors illustrate the need to tighten processes that prevent fraud from becoming an even bigger problem. SMBs can employ the following best practices to get a better handle on their orders and identify which are fraudulent:

• Activate fraud prevention tools in your payment process and back-office systems. Establish a process to review those orders that contain certain indicators of fraudulent activity.
• Require card identification (CID) information (the extra three digits or four digits used for security on all credit cards). Also, require address verification on all orders paid by credit card. Doing so typically ensures the buyer actually has the card in their hand and is shipping to the address associated with the card holder. In cases where it’s a separate shipping address or a gift, verify authenticity.
• Review past orders that have been fraudulent to identify themes that are specific to your business.

SMBs should look closely at all orders and be cognizant of some warning signs of fraud, including:

• international shipping;
• orders without a CID number or a CID that doesn’t match the credit card number;
• orders that are significantly larger than your average order size;
• first-time buyers; and
• overnight requests.

SMBs are hemorrhaging revenue as inventory leaves warehouses, yet banks side with consumers and reimburse them for being a victim of fraudulent activity. Furthermore, many banks or credit card companies won't reimburse the merchant, resulting in brand damage. Implementing safeguards to curtail this activity will go a long way in reversing this trend. The old adage “an ounce of prevention is worth a pound of cure” applies here.

Fred Lizza is the CEO at Dydacomp, a provider of business technology platforms for small and midsized e-commerce and cross-channel merchants. Fred can be reached at fred.l@dydacomp.com.