Many startup founders, like myself, assume that credit card companies are closely monitoring and protecting businesses and customers from fraud and mistakenly believe this is something that just won't happen to you. Here are a few things I learned in starting a company that processes  payments online. Read these points carefully and avoid the costly mistakes I've made along the way!

Credit Card Fraud Will Happen to You

This is guaranteed. Not only is fraud something that every merchant deals with, but fraudsters actually target new companies processing for the first time. This is when you are least likely to have sophisticated anti-fraud tools, and like any startup, you are excited to process every penny that comes through the door.

However, when fraud does happen you'll be the one holding the bag (not the credit card company). 

You Pay the Price of Fraud

Don't believe the cheesy credit card commercials where they are some fierce army battling fraudsters. The real story is that YOU are the army - and if you aren't ready for battle then your finances will be trampled.

Here's how it works - when a transaction is claimed by a cardholder as fraud, the card company immediately deducts the charged amount from the account of the merchant (this means you!) that processed the payment. The onus is then on the merchant to gather evidence and prove that the card holder made this transaction.

If there is no sufficient evidence then the merchant pays the price of the fraud. Sufficient evidence basically amounts to a photo of the cardholder using the card, which disqualifies every single online transaction from ever having enough evidence. Even if the merchant could provide sufficient evidence that the cardholder made this transaction, then the customer pays the price. Under no circumstances do the credit card companies take any risk or make any sacrifice as a result of the fraudulent transaction that their systems approved.

How to Fight Back

The easiest way to fight fraud is to require all of your transactions to be shipped to the billing address of the cardholder. This will eliminate most types of fraud since the goods will not reach the fraudster. 

Payment processing systems that automatically do a great job of detecting fraud are PayPal and Shopify. Shopify has free tools that detect IP addresses, billing addresses and other relevant information to let you know when a transaction is risky. PayPal is great because they simply won't process a risky transaction.

If you choose to use a standard payment processor, like Blue Pay for example, you might get pulled in by the promise of a lower rate (say 2.3% per transaction rather than Shopify at 2.6%). However you may be hit with a ton of fees (Blue Pay transaction averages 4.6% after all of the fees!) and also you won't get any notifications of risky transactions. Standard fraud tools are pretty rudimentary.

PayPal and Shopify both do not add fees - if they advertise 2.6% then it is actually 2.6%.

Bottom Line

You will get targeted by fraudsters and don't let them take your hard earned dollars that your startup desperately needs! Use these tools above and process secure payments that will grow your business, not destroy it.

Published on: Oct 27, 2017
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.