Information on Merchant Accounts,
Ecommerce and Credit Card Processing

May 20th, 2021 by J B

5 Ways Businesses Lose Money via Their Merchant Account.

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Your merchant account should be something that helps you generate sales, but sometimes it can lose you money as well. Here are 5 common ways merchants lose money through their merchant account.

  1. Employee Returns

This is a form of internal fraud where employees make returns to their own credit cards while hoping to hide those returns with the day’s normal business.  This can be fairly easy to catch and remedy however you need to be reviewing your daily batches and comparing those to your transactions.

2. Return Fraud

This type of fraud is usually found in the big box businesses however it can also be applied to small and medium businesses.  Basically, it’s the act of purchasing something at a discounted cost just for the purpose of returning it to another location or business for a higher price.  Many stores will accept goods back for store credit even if you do not have a receipt.  The big box stores are hip to this trick and keep track of who is returning items and will go as far as telling customers they are no longer eligible to return items to their stores.  Smaller businesses however are sometimes more inclined to accept these returns to help build relationships with customers.  In these days of mega online stores and a multitude of discount sellers out there, it’s easy for a fraudster to take advantage of an unsuspecting business.  It can be as simple as browsing what you have for sale locally, finding that same item for half the price online, and then returning it to your store for credit.

3. Friendly Fraud

You know there is nothing friendly about friendly fraud.  This takes a special type of person to knowingly commit this form of fraud.  A customer comes to your business and makes a purchase like anyone else. Its likely that nothing will seem off about the transaction to you.  Once they leave the store is when the fraud is perpetrated.  This customer contacts their credit card company and makes specific claims against the transaction knowing it will be next to impossible for the business to defend themselves through the chargeback dispute process.  The cardholder almost instantly gets credit back on their card, and they never have to return the product.  Free stuff for them, a total loss for the business.

4. Authorization Fraud

I think of this type of fraud as what the sketchy people from #3 move up to.  It takes a ridiculously small amount of social engineering to convince most businesses into assisting the fraudster in walking out with goods without actually paying. 

How does it work?  A fraudster shops just like anyone else, and brings their items to the checkout.  Once the items are rung up they will make some sort of excuse why they need to contact their credit card company to get prior approval.  Many times, the fraudster will give you a credit card that declines when you try to run it.  The cardholder will apologize and call their “card issuer”.  After a bit of a conversation, they will then tell you their credit card company declined the transaction because the amount was abnormal, and they suspected fraud. The fraudster/cardholder may tell you their credit card company gave them an approval code that will allow the transaction to go through.  They may also hand you their phone and the “credit card company” might walk you through processing the sale.  The thing is the authorization code that is provided by the cardholder, or “credit card company”, is fake.  It will settle like any other sale, but several days to a month later the actual card issuer will dispute the transaction saying the approval code used was not issued.  At that point, the merchant is required to pay the card issuer back in full.  Meanwhile, the fraudster is long gone.

5. Not Reviewing Processing Statements

Processing statements a probably one of the last things most business owners want to think about.  If the funds are making it to their bank account, they don’t see a reason to review the statement.

The truth is processing statements are where the processor will provide notice of changes to the account.  Many times, these could be related to rate and fee increases, and while sometimes these cannot be changed that is not always the case.  Contacting your processor to ask about new fees or changes to your fees can result in you saving money.

Also, while there are systems to check account continuity things can slip through the cracks.  I have seen processing statements where the merchant was being back billed for a fee from months past, only to find that all their other statements are being back billed for the same fee.  Like someone setup, a manual back bill and accidentally set it to a recurring fee.

With a merchant statements, you generally only have about 45 days from the end of a processing month to dispute any charges before those charges are considered accepted and final.

Conclusion:

Its not fun spending extra money or having someone steal from you. If you keep an eye on your processing statements and you transactions can easily prevent most losses. When it comes to fraud if something doesnt feel right about the sale its probably best not to accept payment on a credit card. Use your best judgement and dont get carried away by the prospect of an excessively large sales. If its out of the ordinary you need to take a step back and assess the risk of completing that sale.

You wont ever be perfectly protected from loss, but a little work today can payoff in big ways down the road.

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