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MAG Member Corner (MAG Quarterly- Volume Two, Issue Four)


Chargeback Prevention in the Bricks and Mortar Channel
By Dean Sheaffer, Senior Vice President Financial Services, Chief Compliance Officer, Boscov’s Inc.

December 4, 2014

As merchants move toward Omni-channel presence and as the October 2015 EMV liability shift date approaches (October 2017 for Automated Fuel Dispensers), retailers are focusing more and more attention on preventing payment card fraud and chargebacks in the Card Not Present (CNP) channel and rightly so.  The EMV conversion in Canada and the EU demonstrate that we should anticipate a fraud shift from the Bricks and Mortar Channel to the CNP channels, creating a big liability concern for merchants who bear the majority of fraud losses on CNP transactions due to existing card network rules and procedures.

However, the VAST majority of all transactions are still conducted in the Card Present environment.  There are a number of best practices that can help your organization significantly reduce fraud losses. I will recap here just a few of the simple things you can do to optimize your Bricks and Mortar transactions.

  • Train, train, train. Merchants are notorious for having relatively high staff turnover.  Make sure that your on-boarding training and (at least) annual training for your selling associates covers the payment process.  Don¹t forget to cover topics like identifying register tampering, and other suspicious activity. 
  • Make sure your systems recognize high risk transactions and deal with them appropriately.  For example, does your POS system recognize the difference between a hand-keyed transaction and a swiped transaction?  If the transaction is hand-keyed, does your system prompt for and include in the authorization request the CVV2/CID (the three or four digit security code on the back of most cards and on the front of American Express cards) and/or AVS (Address Verification System) information?  In my experience, hand-keyed transactions have chargeback rates a full order of magnitude higher than swiped transactions - make sure your systems recognize and deal with this.
  • Monitor people and systems.  Does a particular register have a high incidence of hand-keyed transactions?  If so, it may need maintenance.  Does a particular selling associate have a high hand-key rate?  If so, you probably have a training issue. Is a particular store, system, terminal or person associated with a high level of chargebacks?  If so you may have a bigger issue.­ Do you have exception reporting in place to identify this type of activity?
  • Consider introducing systems similar to your CNP systems that evaluate the relative risk of a given transaction.  A transaction for $500 in gift cards, paid for by a customer not known to your CRM system, at 9:00 pm on a Friday night is roughly a zillion times more risky than a transaction for $500 in socks and ties by a customer known to you for the last ten years at 3:00 pm on Tuesday afternoon.  Can you distinguish these transactions?  Can you alert your LP staff so that they can monitor the high risk transaction and perhaps even intervene if necessary?  Remember, just because you have an “approved” transaction, it does not mean that payment is guaranteed even in the Bricks and Mortar channel.

As Omni-channel unfolds; as mobile payments initiatives launch in earnest; as EMV becomes a reality in the U.S.; ­ the U.S. payment system will continue to be ever more complex.  Now is the time to evaluate your “core” fraud prevention practices and systems. Only with a solid foundation will we be able to layer on evolving technology and continue to protect our brands and our customers.