The Players of the Credit Card Industry

Who are the main players of the credit card industry?

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One of the main goals of companies that establish merchant accounts is to simply a complicated process. By simplifying it not only do they make their jobs in selling the service easier, but it also makes it easier for the merchant to understand as well. As with any other business, there are also many layers of participants who make a service happen. Knowing whom all of the players in establishing merchant accounts really isn’t necessary to accept credit cards. But knowing who affects your rates and how your account operates allows you to make better informed decisions when establishing an account or working with an existing account.

The Card Companies

Without the credit card companies there would be no credit card to accept. These companies not only issue the credit cards and govern how consumers may use them, but they also govern how the merchants may accept them.

Visa and MasterCard

Visa and MasterCard are separate worldwide payment service organizations composed of member institutions. They set and enforce rules and regulations governing their bankcards, such as operational and Interchange procedures. They create advertising and promotion programs to support their brands and develop new products to serve banks and consumers and are also responsible for conducting clearing and settlement processing of credit card transactions through Interchange. They supervise the bankcard processing function within their members’ banks.

Combined Visa and MasterCard account for 83% of all credit card transactions in the United States.

American Express

American Express started off as a travel card and is often classified as a “Travel & Entertainment” card. However, it is a true credit card like Visa and MasterCard and is accepted at most types of business. American Express is the preferred credit card of many businesses and, although American express usage is far less then that of Visa and MasterCard, businesses that deal primarily with other businesses (b2b) or is frequented by business professionals may see American Express as their primary credit card being accepted. Unlike Visa and MasterCard American Express is not comprised of member banks but is its own entity. This means you need to apply directly with American Express or your merchant account provider needs to be an authorized representative to establish the account for you.

American Express accounts for 13% of all credit card transactions in the United States.

Discover Card

Discover Card was started by Sears and is the newest of the four major credit cards. Although Discover Card has more cardholders then American Express, in terms of processing it is by far the smallest of all of the major credit card providers. Like American Express, Discover Card is not comprised of member banks but is its own entity and a merchant account must be established directly through them. Unlike American Express, however, Discover Card is now partnering with processing banks to have merchant accounts established just like Visa and MasterCard.

Discover Card accounts for 4% of all credit card transactions in the United States.

Others

While Visa, MasterCard, American Express, and Discover Card comprise the overwhelming vast majority of credit card transactions in the United States, they aren’t the only credit cards some merchant may see in the normal day-to-day of operating their business. Foreign credit cards like the Japanese issued JCB credit card are fairly popular on the west coast in Hawaii. Some restaurants may accept the Diners Club card. Truck stops may accept fleet cards. Since these special cards are so limited in their use and acceptance this article will not cover them.

The Card Issuing Banks

The card issuing bank is the bank that issues the credit card. They are a licensed member of Visa and MasterCard and can also be an Acquirer (see below). The Issuing Bank solicits, screens, and approves the cardholder for a credit limit. Once the cardholder has the card, the Issuing Bank approves or declines sales the cardholder wants to make with the card, bills the cardholder for charges to the card, and collects funds from the cardholder to pay the merchant for purchases.

Acquirers and Processing Banks

The Acquirer provides credit card processing services to the merchant by acting as the communications link between the merchant and the card issuing bank. The Acquirer is a member of Visa and/or MasterCard.

Member Service Provider / Independent Sales Organization

A Member Service Provider (MSP) is a licensed broker of credit card services or banks through which business is processed. A MSP is usually an independent salesperson or company who contracts with a bank or a processor to sell credit card processing, equipment, and services to the merchant. The MSP sometimes provides back office functions such as settlement and chargeback/retrieval management, equipment-related customer service, paper storage and retrieval, and supplies. MasterCard originated the term MSP, while Visa uses the term ISO (Independent Sales Organization).

Sales Agents

Sales agents are individuals who represent a MSP/ISO. They are not members of Visa or MasterCard and are not contracted directly with a bank or processor. As a result they are not allowed to sell merchant accounts under their own business name. They must use the business name of the MSP/ISO with whom they are affiliated.

The Cardholder

The cardholder uses the credit card given by the card issuing bank to purchase goods and services or to obtain a cash advance and receives a monthly bill from the card issuing bank for every purchase or use of the card. The cardholder is expected to sign the back of the card and limit its use to only authorized users, stay within the assigned credit limit, and pay the card issuing bank all or a minimum amount of the balance when the monthly bill is received.

The Merchant

The merchant provides goods and/or services to the cardholder. Visa and MasterCard require that the merchant be financially responsible and of good repute and adhere to all rules and regulations set forth by them. The acquirer requires that the merchant adhere to the merchant processing agreement they signed that details the prices the merchant will pay for equipment, discount rates and fees. It also spells out the terms and conditions under which the merchant will conduct credit card business, such as the card types the merchant will accept, chargeback rights, and access to the merchant’s bank accounts.

Platforms and Networks

Processing Platforms, also known as Processing Networks, are the computer networks that electronic transactions occur over each day. There are multiple networks available for electronic transactions to occur over but the merchant does not choose which platform(s) they use. Each acquiring bank establishes relationships with the processing platforms they feel would be best for their business model (usually basing the decision on cost and availability).

Not all platforms are created equally. Each platform establishes a unique API for which software and equipment can communicate with it. Thus, software and equipment cannot use a platform to process electronic transactions until it has verified that it can support that platform’s API successfully. As a result some software and equipment will only work on some platforms and not others.

When choosing a merchant account provider, some merchants will base their decision on the platforms that provider has available to them. This will typically be because the merchant has a specific piece of software or equipment that only works on a specific platform. An example would be restaurants that use proprietary POS software.

MSIQ is dedicated to saving merchants money on what they already have to pay. We believe that educating our merchants about the industry is the best way to earn and keep your business.

Types Of Merchant Accounts

In the world of credit card processing one size does not fit all

Lowest Merchant Account Fees

Businesses operate in different manners and this affects the kind of merchant account they will have. It is important for a merchant account provider to establish a merchant with the proper account during the application process as to prevent the many problems that can arise if the merchant is improperly classified. Having the proper merchant account not only helps to keep a merchant’s rates to a minimum, thus saving them money, but also helps to protect against fraud and chargebacks.

Retail (Card Present)

A retail business is face-to-face with their customers and can swipe their customers’ credit cards through a credit card terminal and process them in real time. Brink ‘n Mortar retail stores are typical examples of a retail business but they are not the only ones. Merchants who have stands at flea markets and have access to a telephone line and electricity can also be retail if they use a credit card terminal at their stand.

A merchant with a wireless credit card terminal is also considered to be retail. Why? Even though they may be standing on a street corner while processing their transaction they can swipe their customers’ credit cards through their credit card terminal and process the sale in real time. As a result they get all of the perks and benefits typically offered to a traditional retail store.

Card Not Present

Businesses that are not face-to-face with their customers at the time of sale are classified as Card Not Present (CNP) accounts. These businesses typically take payment in any of the following manners:

• Telephone
• Fax
• Email
• Mail

The one thing they all have in common is that the merchant is not face-to-face with the customer at the point of sale. These transactions are usually keyed into a credit card terminal or POS software.

Another for of CNP business is merchants who perform recurring billing. Although the very first transaction may occur in a retail environment (face-to-face with the merchant and swiping the credit card through a credit card terminal) every recurring transaction afterwards will not be swiped. Because these recurring transactions comprise the majority of the transaction for this merchant they would be considered a CNP merchant.

In the world of credit card processing one size does not fit all

Internet

An Internet business is very similar to a CNP business. The distinguishing characteristic between the two is how the customer’s credit card information is acquired. An Internet merchant acquires their customers’ credit card information through their website. The customer’s information is physically captured and transmitted through the merchant’s website.

A business is not considered to be an Internet business for the following reasons:

• A company has .com in their business name
• The website that advertises their products but does not take payment
• Customers place an order over the phone by reading the contents off of the website
• The merchant uses a payment gateway to process their transactions

Although some of the situations listed above are characteristics of an Internet business, unless payment is accepted through the merchant’s website, the merchant is considered to be a CNP business.

Mobile

A mobile business is very similar to a retail business. They are face-to-face with their customers at the time of sale. The main difference is that a mobile business does not have the means to process the transaction in real time. Typically this is the result of a telephone line or electricity being available at the point of sale.

To compensate for the lack of resources to process a transaction in real time, a mobile merchant typically uses a manual imprinter to capture an imprint of their customers’ credit cards and obtain a signature. This allows them to manually process the transaction at a later point in time. It also offers the mobile merchant additional chargeback protection typically reserved for retail merchants.

Seasonal Businesses

A seasonal business is only open for a specified period each year. This period is consistent and does not change from year to year. For example, a Xmas decoration store will be open every year from October through December. They won’t need their account from January through September. Seasonal businesses can have their accounts closed for the off-months each year during which they will incur no fees including their monthly service charge.

Typical seasonal businesses include:

• Landscapers
• Fireworks sales
• Xmas/Holiday-based
• Some tradeshow merchants

Seasonal merchants cannot open and close their account at random times. The months they wish to be closed must be determined during the application period. They may vary slightly based on the needs of the merchant but this is on a case-by-case basis. Merchants who were not declared seasonal during the application process typically cannot close their account on a temporary basis.

Some Businesses Should Always Accept American Express

Who Needs to Accept American Express?

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American express is the 3rd most widely used credit card in the US. Depending on who your customers are, not accepting American Express may be a very poor business decision.

A typical retail business’s credit card acceptance percentages will look something like:

Visa – 60%
MasterCard – 25%
American Express – 10%
Discover – 5%

10% for Amex is not a huge number, especially considering that the majority of Amex users also have a Visa or MasterCard. Amex is more expensive than Visa and MasterCard, and businesses often choose not to accept it.

When we look at businesses that sell in areas where there are a lot of business professionals, or they cater to other businesses (B2B), we see Amex percentage go up drastically. Amex has a very strong business card program that many businesses use. Something as simple as having a location near a major business center, can have a huge increase on the amount of people that want to pay with American Express.

For a moderately B2B company, the credit card usage looks more like:
Visa: 45%
MasterCard: 25%
American Express: 25%
Discover: 5%

True B2B companies will see a very large increase in Amex sales, and these can be as high as 50% or more.

Even though your customers may have a Visa or MasterCard, you may lose them as a customer if you don’t accept Amex. Businesses that take their clients out want to pay with their business card. The same thing goes for purchasing office supplies, equipment, computers, paper, food, or anything else that could be considered a business related expense. If you don’t take Amex, the people wanting to use their Amex business card will find someone else who does.

Turning down sales because they cost a little bit more, doesn’t save money because those people are no longer spending money with you.

A Business Survival Secret

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In these turbulent economic times, it is imperative that business owners seek and embrace ideas to save money. One expenditure-reduction secret hinges on this often over-looked principle: the way a business collects money may be an integral factor in how much money that business collects. By devising an advantageous accounts-receivable system, owners pave the way for favorable cash flow.

How can business owners collect money due (to them) in quicker, cheaper and more effective ways?

Cash flow is crucial to a business’s vitality. One of the primary reasons any given enterprise fails may be attributed to cash flow problems where expenses outpace revenues. Future returns cannot offset present day expenditures. Thus, by maximizing revenues, by instituting a method where a company collects payments in a more timely, efficient manner–cash flow becomes more favorable and concomitant business success appears more likely.

The operative question arises: “How can business owners collect money due (to them) in quicker, cheaper and more effective ways?” Companies specializing in outstanding payment services can implement services immediately and serve as a means of keeping owners’ prices competitive while preserving profits–a rare combination for today’s business establishments. The following provides a glimpse of several exciting accounts receivable services:

Checks by Phone: This service is especially ideal for owners whose business has a mail order component. Payment is secured via the telephone upon the customer’s authorization and deposited into the owner’s account within 48 hours. A phone checks system offers a distinct advantage over credit card processing: tremendous cost savings (as high discount/transaction fees do not exist).

Online Electronic Checks: Here, an owner may easily accept and process electronic check payments directly on his/her website. It takes less than two days for the funds to be transferred to the owner’s account (a much shorter duration than a paper check). Again, credit card expenditures are avoided as the potential number of clients increase. In addition, “impulse” purchases are more likely to occur.

Automated payments: Various companies have the software to produce bank drafts for businesses that expect to receive payments on a recurring (e.g., monthly) and/or nonrecurring basis. These drafts collect customers’ payments using automatic bank deductions from their checking accounts. Paper drafts are delivered to the owner on their due date. For larger businesses, payments may be processed through the ACH system. Using an automated payment system, owners need not worry about late payments and unnecessary time and labor costs.

Electronic check conversion: Paper checks are handled in much the same manner as credit cards where the owner receives payment within two days. A check is scanned and, like a credit card, is converted to an electronic item at the point of sale. Conversion machines may come equipped with verification (to ensure that a potential customer is not listed on a negative database of individuals who have previously bounced checks) and technology to electronically collect that “falls through the loop” NSF check. Research indicates that about 18 billion point-of-sale checks are written every year in the United States and a business can increase its profit potential 30% by accepting checks.

MSIQ can perform a detailed and honest black & white numbers analysis to add efficiency to your costs

Credit Cards: Ultimately, a business owner must still include this option, as this may be the preferred method of payment by customers. Retailers must be aware, as many credit card carriers overcharge for equipment and quote unreasonable discount and transaction rates. In addition, subtle fees may come into play that cause “cash flow paralysis.” An owner must perform due diligence when contracting with credit card carriers, taking price and quality of customer service into account. Contrary to popular opinion, banks are usually not the best resource.

Substantial profits may be obtained by knowing how to cut expenses and optimize efficiency. A vibrant and healthy accounts receivable system saves more than money; indeed, it just may save the enterprise! MSIQ can perform a detailed and honest black & white numbers analysis of your current rates, or setup low rates for those businesses that do not yet accept credit card payments.

Qualified Rate Structures

Rate Structures And How They Are Determined

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Rates and fees charged by a merchant account provider can vary in numerous ways, including the manner in which the transaction with the customer is conducted by the vendor. When a vendor charges the credit card of a “regular” customer in what is called a “standard” transaction, they will be charged fees at the lowest qualified rate by the merchant account provider.

Exactly what constitutes a “standard transaction” will be defined by the provider; however it will generally be the “safest” method of performing the transaction. That is, there is little doubt as to the authenticity of the purchaser; they have been properly validated, etc.

Over the internet, the purchaser could be pretty much anyone

The easiest way of thinking about qualified rates is to imagine transactions conducted over the internet, and transactions done in a retail store. Over the internet, the purchaser could be pretty much anyone, with credit card details they happened to come across, and the goods they are purchasing could be about to be delivered anywhere (even over the other side of the world). The potential for fraud is massive and so the vendor in this instance will usually get an unqualified rate.

Compare this to the transaction that happens in an actual store. While the potential for fraud is still there, the vendor is able to verify the identity of the holder of the credit card (including that they actually possess the card and haven’t just found some random numbers on the internet), and there are also no concerns regarding shipping. Such a transaction will usually be deemed to be qualified by merchant account providers.

Mid-Qualified Rates

A provider will charge a mid-qualified rate in instances where the fully qualified rate cannot be applied, or the rate does not apply to the particular transaction for some reason. This may be because of:

• a rewards credit card being used (i.e. shopping points, consumer points, air points, etc);
• a cash bank card being used (i.e. 1% of all purchases back in cash); or
• other reasons such as the credit card number being keyed in to the point-of-sale machine instead of the card being swiped (as they do for pizza deliveries).

In fact, processing transactions that involve reward and cash back cards can make up a very large percentage of the interchange costs involved.

Non-Qualified Rate

As discussed above, the non-qualified rate of a merchant account provider will usually entail the highest amount of interchange fees being levied on the transaction. A transaction may be classed as non-qualified for several reasons including:

• proper identity and address verification procedures not being performed;
• transaction settlement times not being adhered to (note that there may also be additional penalties, fees and other action taken as a result of this); and
• Where information that would normally be provided in a “standard” transaction is not provided, either due to the special nature of the transaction or otherwise.

Plastic Fantastic – A Beginner’s Guide to Accepting Credit Cards

Plastic Fantastic – A Beginner’s Guide to Accepting Credit Cards

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THE SOUND OF ONE CARD SWIPING

Face it, the cash economy is winding down. Credit cards are ubiquitous, and if you’re selling anything more than gum and newspapers, you probably should be accepting plastic. If you’re ready to enter the world of “merchant acquiring”, (the strange name for the process of merchants accepting credit cards), we’ve put together a little introduction here.

Credit Card processing starts at the point of sale. Say your customer wants to buy a new widget. She hands you a Visa card. The store clerk swipes the card through the electronic terminal, maybe punches some numbers, and waits for “authorization.” After a few seconds, the authorization is received, a receipt is printed, the customer signs, and off she goes with her widget.

When you’re shopping for a merchant account, spend some time and ask the right questions. Understand the whole package — don’t just look at at the discount rate, for instance

Here’s how Authorization works: after swiping a card, the card number and related data go through an Acquiring Processor (who handles the merchant’s side of a credit card transaction), which channels the transaction to the credit card company (e.g., Visa). The credit card company requests authorization from the Issuing Bank (the bank that issued the card). After the Issuing bank approves the transaction, it transmits an approval code back through the credit card company to the Processor and the Merchant at the point of sale.

It’s a long electronic trip, but it takes only seconds. And the story isn’t over yet — the merchant hasn’t been paid! That doesn’t happen until “settlement” takes place.

Settling usually happens at the end of the day by either taking paper sales receipts to the bank (common in ancient times) or transmitting the receipts electronically from the card terminal in a batch. The receipts go down the line to the Acquiring Processor, which plays traffic cop, routing the transactions to the different credit card companies. The credit card companies funnel the transactions to the Issuing Banks for posting to cardholders’ accounts. At the same time, the Processor credits the merchant’s account and a processing fee is deducted, better known as the “discount rate” (typically 1.75% to 3% of the sale).

There’s more to credit card processing than our point-of-sale example. What about phone orders, mail orders, e-commerce orders? These are known as “MO/TO” or mail order/telephone order transactions, and the dynamics are different, the risks higher. These orders don’t have the benefit of signature verification to ensure the customer’s identity. Many financial institutions require that such transactions be covered under separate “Card Not Present” merchant accounts. Expect discount rates to be higher for MO/TO.

Avenues of Pursuit

When you’re shopping for a merchant account, spend some time and ask the right questions. Understand the whole package — don’t just look at at the discount rate, for instance.

Here are some things to look for, in addition to the discount rate offered:

Check to see when settlement occurs. After all, this is when you get your money. You might get a discount rate advantage, but if you don’t get your money for days, you lose the value of the cash flow.

What kind of technical and customer support does the processor offer? (Anyone remember Murphy’s Law?) Is support available 24×7?

Some processors offer customized services for certain businesses: retail, hotels, restaurants, doctors and lawyers, telephone sales, etc. In some cases this can reduce administrative and operational costs substantially. See what the specialized offering is, look for the fine print, and compare it to a generic offering.

Keep an eye peeled for hidden costs such as statement fees and voice authorization charges. Many of these fees are a part of doing business, but they can vary a lot, and if you need extra support, you don’t want to be paying excessively each time you use it.

Above all, read and understand the terms and conditions before you sign up. Merchant processing is a complicated endeavor, and you need to know exactly what you’re signing up for.

Even if you’re starting out simple, make sure your merchant provider is flexible enough to accommodate transactions. Even though you may just have a simple store today, tomorrow even simple stores may turn out to be e-commerce players.

COSTS AND RISKS

Chargebacks

If there’s a downside to accepting credit cards for payment, it can be encapsulated in one word — chargeback. A chargeback occurs when a transaction is reversed, and the amount of the transaction, previously credited to the merchant’s account, is then deducted.

Chargeback rules were originally created to protect cardholders from erroneous transactions, which were more common when transactions were processed using little slips of paper. Now chargebacks occur for many reasons: unauthorized credit card user, no signature on the receipt, double-charging errors, credit card expired, bank error and customer disputes. Be careful with chargebacks; too many will risk losing your merchant credit card account.

Precautionary tactics are the best preventative medicine. Make sure you follow the rules set by the bank/processor. You need a routine for processing credit cards, and your sales staff must follow it religiously. For phone and Internet orders, get the customer’s home and work phone numbers, and verify that info before sending merchandise.

A great way to head-off customer disputes (and chargebacks) is to provide a liberal return policy. In those cases where you can’t avoid a customer’s attempt for chargeback, you’ll need to provide suitable documentation (sales and shipping receipts) to refute any claims.

Up-Front and Hidden Costs

Yes, there are costs associated with credit card processing  —  no gain without a little pain. Below are typical costs you might face, with some ballpark estimates. All of these should be taken into consideration when you’re comparison shopping for a merchant account.

Application fee ($0 — $300)
Installation/setup fee ($0 — $100)
Bank setup fee ($0 — $75)
Terminal costs ($200 — $2000) (Ask me about free placement machines…)
Statement fee ($0 — $10 per month)
Minimum account billing (varies…often not required)
Chargeback fee ($25)
Voice authorization fee ($0 — $1 per call)
Transaction fee (Varies, usually around .25 per transaction)
Daily close-out fee (Varies…often not required)
Discount rate (1.75% to 3% of sale)

Despite the costs, consider the upside: credit card sales are a customer-centered service; they’ll love you for the privilege of paying by plastic. Plus, customers tend to buy more per sale when paying by credit than cash.

And don’t forget, there are also costs associated with handling cash — counting, trips to the bank, the hassle of keeping adequate change on hand, and even potential losses through mishandling currency.

A PLAN TO BUILD ON

1. Understand the credit card process before making any decisions. Apply new knowledge to your unique circumstances — ask questions, network, e-mail your colleagues and other websites.

2. Shop around, and keep a running list of the features and benefits of each provider, plus the costs. Start with the costs on the previous page, but be sure to dig deep to uncover any potential costs with each provider. Don’t overlook the benefits of working with a world-class full-service provider (MSIQ). The added operational and technical support you might receive can be well worth a slightly higher discount fee.

3. If you are a small home or mail order business, you might have some difficulty getting approved. If so, you might start with your existing bank, or another small to medium-sized bank. When you apply for an account, expect to be asked for full financial disclosure — banks are quite sensitive to credit card fraud.

4. If your bank or another processor turns down your request for a merchant account, never give up! Try other banks/processors — there are lots to choose from. You could also opt for an Independent Service Organization (ISO), which shoulders the risk and contracts with a bank on your behalf. Buyer beware though — always explore all the costs, fees, and charges associated before entering into any agreements.

5. Keep your eye on where you’re headed and where you want to grow. The goal with credit card processing is getting the infrastructure in place so you can sell smoothly, conveniently, affordably, without glitches and holdups — a process scaleable to your aspirations.

For instance, currently you may run a cash-only business and want to grow into point-of-sale credit card transactions. Fine. But where do you want to be in a six months, a year? Do you foresee accepting orders over the phone or setting up an e-commerce store on the net? This kind of forward-thinking will help you make the right up-front decisions.

When You’re Up and Running

When you get your merchant account and begin accepting cards, be sure to establish and follow good operational procedures. Your provider will assist you in understanding required procedures. Key items are signature verification, authorization procedures, and physical card inspection.

Be careful  — different cards may require different procedures (e.g., American Express v. Visa/Mastercard), and there will be different procedures per transaction type (point-of-sale, phone, mail, and e-commerce orders).

More than anything else, following the correct operational procedures will protect your business against chargeback losses. Make sure everyone handling transactions for your business knows the procedures. Training is key, although posting reminders and “cheat sheets” at the point-of-sale can be very beneficial as well.

What Does a Fraudulent Transaction Look Like?

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Nearly every online business will run into a visitor that is trying to make fraudulent purchases on their website at some point.

Hopefully the transaction or situation can be identified and corrected before it ever becomes a real problem.

Unfortunately, fraud has become synonymous with online business. There are so many ways that fraud can be committed through a website, with several desired outcomes for fraudsters. Not all fraudulent transactions are made to obtain merchandise. Card testing is another problem that some merchants face, where the transaction is not meant to obtain goods.

It is important for merchants to be able to identify fraudulent situations and purchases before there is ever a shipment of products. Voiding a transaction is far easier to do than obtaining merchandise lost to a fraudulent transaction.

Businesses will always suffer more from fraud than consumers!
Lets face it. Merchants will lose every time fighting a fraudulent order chargeback that was successfully processed through their business. Credit card fraud regulations are designed to protect the consumer and only the consumer. Businesses have very little recourse if they process a fraudulent order and ship the product. The best method to fight fraud is to prevent fraud. To do this, merchants need to take a proactive approach to combating credit card fraud.

The 2 main types of fraud that merchants face while doing business online are card testing and fraudulent orders.

Card Testing (or Carding):
Card testing is a type of fraud that many merchants are not aware of. It can have devastating effects on a business even though the business may never ship out any merchandise due to a fraudulent transaction. Card testing is the systematic testing of credit card numbers, in pursuit of finding a valid credit card number / expiration date combination. Card testing can be spotted by observing a large number of declined transactions through a payment gateway, usually in a sequential and consistent pattern. Many declined transactions followed by an approved transaction for a single user can also be card testing. Card testing is usually done with small amounts. The tester only wants to find valid numbers, and is not after tangible goods, yet.

Card testing can be very costly to a business. Most businesses are charged for every transaction, declined or approved, that they attempt. Card testers can attempt thousands or even tens of thousands of tests in a day. At about $.25 / transaction, it can get extremely expensive. Visa and MasterCard also monitor gateway addresses that have huge numbers of declines on them for the same reason. Allowing the continuance of a card tester can ultimately lead to a merchant being shut down, even if the merchant had no idea it was happening.

Card testing has 2 different phases. Phase 1 is trying to find a real card number. Phase 2 is finding an expiration date to match the card number previously found.

By using the Luhn algorithm, a tester can produce a list of valid credit card numbers. The next step is to test these numbers to see if the card is real. Once the tester finds a real card, they submit expiration dates until the card is approved. The tester builds a computer script to place automated queries into a merchant’s payment gateway. These scripts can be very complex and some can foil fraud detection software.

Card testing is reliant on 2 factors of an online payment gateway. Removal of either of the 2 factors will completely prevent the effectiveness of card testing. First, the merchant’s website must give different responses for a declined cards based on the decline reason. This is key, as a tester needs to know why the card was declined, was it a bad number or bad expiration date. Secondly the tester needs to be able to get an approval without a valid address.

Once the script finds a valid card number, but getting a wrong expiration date response, the card tester then tests expiration dates until he gets one that matches. Now he has a valid credit card number and expiration date.

Card testing is a type of fraud that many merchants are not aware of. It can have devastating effects on a business even though the business may never ship out any merchandise due to a fraudulent transaction.

Preventing Card Testing:
Preventing card testing is fairly simple. Monitor the declined and approved transactions processed through your gateway daily. Make sure that the payment gateway’s decline response is the same no matter what the reason for a decline is. Finally, make sure that a valid verified address is required before approving a transaction. These three steps will prevent card testing almost entirely.

Fraudulent Orders:
A fraudulent order is when a person illegally orders something on a stolen card in order to actually receive a product. The thief may have drop off addresses where they can pick up a delivery anonymously.

Fraudulent orders can be very costly because a merchant is setup to lose their shipped goods and later lose when the real card owner charges back the fraudulent purchase. Most fraudulent orders are never recovered after they are shipped.

Preventing Fraudulent Orders:
Fraudulent orders are more difficult to stop than card testing, but through analyzing orders that are processed through a website most can be eliminated. Fraudulent orders have the tendency to look abnormal compared to a normal order. Whether a large amount, requesting expedited shipping, strange shipping addresses, or other factors, most fraudulent orders are different than normal, and thus stand out when compared to regular orders.

Common Fraudulent Order Flags:

• Abnormally High Ticket Price.
• Different Shipping and Billing Addresses.
• Orders from Nigeria, Anywhere in Africa, Indonesia, the Philippines, or foreign orders in general.
• Requesting Expedited Shipping.
• Offering More Than the Listed Price for the Product.
• Unusual Quantity or Type of Product Ordered.
• Free Email Address (hotmail, gmail, yahoo, etc.)
• Fake Sounding Name (Ex: Rickey Rickerson).
• Persons Requesting a List of Products From You First.
• Incorrect or Fake Phone Number

Always use AVS and CVV/CV2/CVC (Card Verification) on every transaction you process. This will at the very least guarantee that the card holder has the card, and it is being billed to an address registered to the card.

If possible, check each order that is processed through your website. If you come across a suspicious order, call the customer to verify who they are. If the order is extremely large or talking to them is unconvincing, request them to fax a copy of their drivers license to you, and a signed invoice. These may be a small inconvenience to some of your customers, but the cost of fraud to your business is far greater than not taking the extra steps. Most customers are happy to verify information with you, as preventing fraud is a concern of theirs as well.

Also if you can, require a signature with every package that you ship. A signature is the only way to prove proof of delivery.

If a fraudulent order is successfully placed through your website, ‘YOU’ are the last defense. Remember that the perfect customer also fits the profile of someone ordering fraudulently.