Credit Card Fraud Detection: What You Need to Know

Read Time: 5 min

If you’re a business owner you know credit card fraud detection is no joke. Understandably, with increased credit card sales comes an increased risk of credit card fraud for both consumers and merchants. With around 46 percent of global credit card fraud happening in the U.S., it’s absolutely necessary for merchants to take proactive measures to protect themselves. In this article, we discuss best practices for mitigating the risk of credit card fraud to your business, as well as helpful credit fraud detection techniques you can use to stay protected.

The pandemic has accelerated already increasing credit card growth, shifting the demand for merchants to offer an eCommerce website in addition to their brick-and-mortar services. In September of 2020, online sales in the U.S. rose to 43 percent over the previous last year.

Consumers are telling us they want to spend money at businesses. However, with more and more credit card payments, there’s a higher risk of fraud for both the customer and the merchant.

What is Credit Card Fraud?

Before diving in any further to credit card fraud detection, let’s take a step back to understand what credit card fraud is. This type of fraud occurs when a thief uses a person’s credit card information to make unauthorized purchases or cash advances. Some of the common ways fraudsters get ahold of credit card information include:

  • Digging through trash to find discarded credit card statements or receipts
  • Luring a victim to a fraudulent website where they are tricked into providing their credit card number
  • Swiping a credit card at a local ATM or gas pump where a credit card skimmer was installed
  • Causing data breaches of major retailers and acquiring their customers’ information
  • Someone with access to a person’s credit card information such as a resident, visitor, or service technician steals the information

Fraud detection techniques can help merchants identify whether a purchase is legitimate. This will help protect both the consumer and their business from fraudulent transactions.

What is Credit Card Fraud Detection?

Credit card fraud detection is a series of steps a merchant takes to prevent products or services from being obtained from illegitimate credit card transactions.

Man paying online with his credit card

Merchant services providers have many credit card fraud detection tools merchants can rely on to reduce the chances of a fraudulent transaction from occurring.

Why is credit card fraud detection so important to merchants? In 2018, fraudulent credit card activity caused merchants to lose more than $2.94 in revenue for every $1 in fraud. Online merchants have higher risks associated with credit card fraud due to the nature of their business. Card-not-present transactions host the most prevalent and costly type of credit card fraud. It’s important to create a space for safe online shopping for your customers if your business is online.

Ultimately, what this all means is credit card fraud is a clear and present danger to your business. It is a costly threat to your bottom line. Therefore, it’s imperative that your business must arm itself with adequate credit fraud detection tools to protect itself.

How to Prevent Credit Card Fraud

Luckily, there are plenty of useful credit card fraud detection tools available to merchants. Take proactive steps to arm your business with fraud detection techniques. Here are some fraud protection tools your merchant services provider may offer that can help reduce fraud from happening to your business:

  • Address Verification (AVS): This is especially important for merchants with an eCommerce business who must process card-not-present transactions. Requesting the billing addresses for each transaction will check the following: whether the billing address matches the contact information on file with the issuing bank, and if the customer is attempting to ship the item to a different shipping address.
  • Card Verification Value (CVV): This is a three-digit card verification value that is found on the physical card. This code can help a merchant verify whether the card is being used by the true cardholder or not.
  • Fraud scoring: This is a data-driven approach that analyzes the likelihood of fraud based on characteristics like IP address, AVS code, and more.
  • Geolocation: A tool that matches the credit card location with the customer’s IP address, smartphone, or in some cases–their home address.
  • Machine learning: Another type of fraud scoring, where algorithms and AIs are used to analyze the likelihood of fraud. There are different types of software used in this technology.
  • Velocity limits:  This technology prevents too many subsequent transactions or credit card activities from occurring.

Other considerations

Security compliance and credit card fraud detection go hand in hand. Any merchant processor your business considers should be PCI DSS compliant. This means your business meets a set of standards required of companies that process or transmit customer information to ensure data is handled securely. Furthermore, if you fail to meet these requirements you’ll be charged a PCI non compliance fee.

For your brick-and-mortar locations, use credit card machines and other secure POS technology to accept credit card payments. These types of devices are more secure and prevent fraudsters from using a credit card skimmer to steal swiped information.

Fraud Detection Techniques

card fraud detection

Whether you operate your business on your own or employ others, make sure everyone is involved in spotting suspicious behavior. These fraud detection techniques are easy because they simply require you to observe your customers. After spending some time on the sales floor, you get a feel for how people normally behave in your retail space. Then you and your employees can spot when someone is acting strangely. This credit card fraud detection technique may seem like a no-brainer but can help you in the long run.

Monitor shopper behavior

If someone is behaving differently from most customers that enter your store, it doesn’t automatically mean they’re a fraudster. That being said, it’s something to pay closer attention to. Someone who appears nervous, jittery, or tries to talk a lot during the transaction is someone to be on the lookout for.

Look out for suspicious transactions

Some transactions experience higher rates of fraud than others. Electronics, gift cards, digital goods, luxury items, and jewelry are among these purchases. Use the AVS tools explained earlier to help verify the cardholder’s identity by requiring that they enter their billing information. You can also ask for identification to make sure their card matches the name on their ID.

Credit Card Fraud Detection: How to Report it

If your credit fraud detection tools have made you suspicious that a transaction is potentially fraudulent, you must take additional steps.

Here’s what to do:

  1. While the suspected fraudster is in the store, call the card issuer and ask for a Code 10 authorization.
  2. You will be asked a series of “yes” or “no” questions while on the phone, which should not alarm the customer.
  3. Once you have answered all the questions, the operator will advise you whether the transaction is valid or not. They will also walk you through what to do next.

Once you complete this credit card fraud detection process you can rest easy knowing you have exhausted your resources to protect not only your customer’s security but your business as well.

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