Understanding Fraud as a Small Business
- Stolen cards aren't the only source of disputes
- Real customers can dispute purchases they made. Check your own dispute mix
- Work out which one you've got before you buy a tool. Pull your last 20-30 chargebacks and sort them: stolen card, or real customer disputing a real order
- If it's mostly real customers, you have a communication problem. Better descriptors and easier refunds fix more than fraud software will
Don't assume every chargeback came from a stolen card. Real customers can dispute purchases they made, including charges they don't recognize. Check your own records before deciding which problem to fix.
Work out what you're dealing with before you buy a tool.
Pull your last 20-30 chargebacks. Ask one question of each. Stolen card, or real customer disputing a real order? That answer tells you whether this is a fraud problem or a communication problem.
The Three Types of Fraud That Hit Small Businesses
| Type | What It Is | How Common | Example |
|---|---|---|---|
| Third-party fraud | Someone uses a stolen credit card on your site | Varies by business. What the surveys say | You ship a laptop to a stranger who used someone else's Visa |
| Friendly fraud | A real customer disputes a legitimate purchase | Varies by business. What the surveys say | Customer buys your course, watches it, then says "I didn't authorize this" |
| Card testing | Fraudsters run small charges to check if stolen cards work before spending big | Varies | You see 50 transactions for $1.00 from different cards in an hour |
A costly mistake is to see chargebacks, assume stolen cards, and buy an expensive tool. If your disputes are friendly fraud, the tool won't help. You need a clearer billing descriptor and an easier refund path.
Check Whether Friendly Fraud Is Your Main Problem
A customer doesn't recognize a line on their statement. They call the bank, not you. The bank files a chargeback. You lose the money and the fee, usually $15.
Common reasons customers dispute legitimate purchases:
- Your billing descriptor says "PAY*ACME LLC" instead of your business name
- They forgot about a subscription renewal
- A family member used their card without telling them (that one is genuinely unauthorized, not friendly fraud)
- They had buyer's remorse and found disputing easier than returning
- They genuinely don't remember the purchase
The fix for most of these is communication, not technology:
- Use a billing descriptor that matches your business name
- Send purchase confirmation emails immediately
- Send reminder emails before subscription renewals
- Make your refund process easy and obvious
When Stolen Cards Are the Real Problem
If you see these patterns, you likely have a third-party fraud problem:
- Shipping address doesn't match billing address
- New customer places an unusually large order
- Customer requests rush shipping on a first order
- Multiple orders from different cards going to the same address
- You sell high-resale items (electronics, gift cards, luxury goods)
The good news: your processor already ships AVS, CVV checks and 3D Secure. Those catch most of it. You probably don't need to buy anything.
What You Lose When Fraud Happens
Example worksheet: assume an unrecovered product or service cost of $100, $5-15 shipping and $3 in retained processing fees. Add your actual dispute fee and hourly cost:
| Cost | Amount |
|---|---|
| The product or service | $100 |
| Chargeback fee | $0 to $30, usually $15 |
| Shipping costs (if physical goods) | $5-15 |
| Processing fees (non-refundable) | $3 |
| Time spent responding | 1-3 hours |
| Total example cost | $108-$148 before staff time; add hours x hourly cost |
Let your chargeback ratio breach your processor's written limit and you risk fees. Or a closed account. Check your limits.
The "Do Nothing" Threshold
Under $100K a year, you probably don't need fraud tools beyond your processor's.
The built-in rules handle the obvious stuff. A few chargebacks a year cost less than a subscription. Spend the effort on your descriptor and your customer emails.
When to start investing in fraud prevention:
- Your chargeback ratio is rising toward your processor's limit
- You're seeing patterns (same device, same shipping address, burst of orders)
- You sell high-risk products (digital goods, electronics, gift cards)
- Your volume is growing past $100K/year
When you're ready, the Fraud Vendor Landscape covers what exists. The Vendor Selection Guide ranks it by business type and ROI.