The Effects of Credit Card Fraud and Safeguards for Businesses - Research Paper Example

The Effects of Credit Card Fraud and Safeguards for Businesses As early as the 1800s, businessmen and consumers have exchanged goods through the credit concept either as charge plates or credit coins in place of currency. It was not until the1950s that credit cards became a way of life. For instance, departmental stores and oil companies issued proprietary cards in the early 1900s. These cards were accepted in limited locations and at the business that issued the card. Nowadays credit cards have become common and are used for convenience. Despite the convenience of credit cards, the fast changing online market puts businesses dealing with credit cards susceptible to financial loss through identity theft, fraud, and bad debt, which are costing the companies billions of dollars annually. A study by Javelin Strategy & Research revealed there were 13.1 million identity theft cases in the United States. Fraudsters or identity thieves have evolved into hacking accounts and making online purchases through the hacked accounts. This accounted for 5 billion dollars in financial losses. This paper addresses three issues surrounding credit card: types of credit card frauds, the effects of credit card fraud on businesses, and ways through which companies can caution themselves from credit card breaches. Financial and data loss occur in varied ways according to Herron (Bai & Chen, 2013). Fraudsters and identity thieves use various techniques to steal credit card information. Firstly, they use credit card skimming. This is a means of stealing credit card numbers where a small device is inserted into an ATM to store information. Skimming is done when a card is swiped and can also be done for a credit card reader. Skimming devices are discreet and small and often would not be noticed unless they were being looked for. The recorded information is retrieved manually or through Bluetooth to a tablet or a phone. A waiter, gas dealer or a sales attendant at any business could use skimmers to steal credit card information leading to financial and data loss. Secondly, online hackers target credit card information that is stored in various businesses’ computer systems. In 2013, Home Depot, an established America company was hacked, and data stolen. A data breach is done when a hacker uses malicious software or “malware” to infiltrate a company’s system where credit card information is stored. The information may include security codes, expiry dates, and card numbers. Cases where company workers have manually stolen card information though rare have also been recorded. This has affected approximately 56 million credit and debit cards in the United States. Consequently, fraudulent emails are also used by identity thieves to steal card information (Bai & Chen, 2013). Phishing emails are those that are designed to look legitimate, from a company or financial institution that one frequently visits. The email directs one to a fake website that looks identical to the real site. Once one enters their card number and login details, the phishes capture their information. Credit card breaches cause great financial loss to the company. According to the Business Insider, intelligence estimates of the global payment card fraud, the United States accounted for 51 percent (Heggestuen, 2014). The payment card fraud worldwide grew by 11 percent to account for 6.8 billion dollars loss to businesses. David Pommerehn from the Consumers Bankers Association says that to quantify the costs of fraud is difficult since they are paid by consumers and businesses. The losses of fraudulent purchases are usually absorbed by acquirers, merchants, and card issuers. Consumers take no liability and have zero responsibility for fraudulent credit card purchases. Card issuers usually cover fraudulent purchase costs or those made in stores. Merchants and acquirers cover “card not present” transactions made online inclusive of charges disputed by the merchants. Of these, most of the losses are taken up by the card issuers. Additional costs are incurred handling and settling legal suits brought against the company as a result of card security breaches. Moreover, companies experience low revenues, as many customers will shy away from the business’ products or services (Donnelly, 2013). The loss of reputation and investor confidence is a subsequent effect of credit card fraud. According to an article in Forbes, a retailer shop in the U.S., was attacked by hackers who stole their data (Groeneldt, 2014). The breach on Target in 2013 by fraudsters affected investor confidence and influenced their share price downwards between 3.85 dollars and 4.15 dollars per share at the end of the year. This consequently, affected the company’s reputation with consumers and shareholders. Target suffered a cumulative loss of 61 million dollars. Businesses can protect themselves from fraudsters and their effects through ensuring that they manage their information systems securely. This can be done, when businesses get all proper information related to a credit card by being up to date with the ever-changing credit card security features. When a prospective client makes a call, the business must ensure that the caller reads the cardholders name exactly as it is on the card, the cards expiry date, the phone number and complete address of the account holder (Laudon & Traver, 2011). Consequently, they must ensure not to ship goods to customers who have not provided their full name as they may offer a bogus name or address (Donnelly, 2013). Fraudulent transactions often arise from stolen numbers not stolen cards and hence a person who gives this number is unlikely to possess a stolen credit card. Thus, the address verification service can be used to compare the banks database with the billing address. According to VISA, card verification has reduced chargebacks by 26 percent. Secondly, businesses must be cautious with orders that use the different “bill to” and “ship to” addresses as it could show fraudulent credit card use. Telephone numbers for the billing and shipping locations must be acquired. With the acquired information, one can use the internet to check whether the billing address is sincere or bogus. In addition to this, businesses must be wary of large sudden delivery orders. Next day orders and deliveries should raise a red flag, as fraudsters are aware that they must have their orders approved as soon as possible before their discovered and canceled (Fichtman, 2012). Consequently, ensuring the order is validated before shipping is also an important safeguard. This can be done by requesting the customer for a copy of their identification card and copies of both sides of their credit card. Finally, if fraud is found, reduce damage by taking immediate steps. Report the crime to the authorities and call the issuing bank to the cardholder and request that the bank contacts the owner of the card as one will be in possession of the contact where the products are being shipped to. Moreover, trust your instincts is also significant. When a customer is not confident of the information they are giving, do not send the products. It is better to lose an order than lose products free. Finally, relying on external third party processors to take care of credit card payments also protects the business. This ensures that customers enjoy credit card services without the business incurring chargebacks and bad debt. The electronic wallet concept (e-wallet), a third party processor, is becoming the safest way to shop online. According to statistics of the mostly used e-wallet services PayPal was most common with a 79 percent usage rate (Fichtman, 2012). Through the e-wallet, a user transacts with an online business directly. This is a fast, safe, and quick way to pay online. The E-wallet providers are regulated by financial institutions in most countries around the world. Users of the service must fulfill identity verification that ensures that businesses do not transact with unknown customers. Some services also shield businesses from chargebacks and bad debt. In conclusion, financial data loss and the loss of company reputation are some effects of credit card fraud. With this in mind, companies must take up measures to protect themselves. Measures such as updating credit card security features to being sure about customers’ credit card information through verification processes must be undertaken. In addition to this, education and awareness creation about identity theft is paramount in financial institutions and on all online businesses where consumers use credit cards. Saving is important for any institution, but there is nothing as damaging as losing money through fraud since it is stolen directly from you. As long as credit card processing exists, fraud will always be a reality. It is prudent, therefore, to ensure that businesses protect themselves by using these practices. References Bai, F., & Chen, X. (2013). Analysis on the new types and countermeasures of credit card fraud in mainland China. Journal of Financial Crime, 267-271. Donnelly, A. (2013.). Online credit card fraud outpaces physical world. Computer Fraud & Security, 9-9. Fichtman, P. (2012). Preventing Credit Card Fraud and Identity Theft: A Primer for Online Merchants. Information Systems Security, 1-8. Groeneldt, T. (2014, July 17). US Credit Card Fraud Is Spiking Ahead Of EMV Secure Chip Introduction. Forbes. Heggestuen, J. (2014). The US Sees More Money Lost To Credit Card Fraud Than The Rest Of The World Combined. Business Insider. Laudon, K., & Traver, C. (2011). E-commerce: Business, technology, society (Ninth ed.). Read More