Protect Your Small Business from Credit Card Fraud with Insurance

Credit card fraud is a growing problem for small businesses. As more sales move online and in-person credit card use increases, the risk of fraud does too. Fraudulent transactions can cost your business money and hurt your bottom line. Credit card fraud insurance can help protect small businesses from some of these costs. This guide will explain what credit card fraud insurance covers, what it does not cover, and how to choose the right policy for your small business.

What is Credit Card Fraud?

Credit card fraud happens when someone uses a credit card or card information without permission from the authorized card holder. There are a few common types of credit card fraud:

  • Stolen card fraud – This is when someone steals a physical credit card and uses it to make purchases.

  • Account number fraud – This is when someone gets access to just the credit card number, expiration date, and security code. They can then make online, phone, or mail order purchases without the physical card.

  • Identity theft – This is when someone pretends to be the authorized cardholder by using their personal information. They open new accounts in the victim’s name and make fraudulent charges.

  • Friendly fraud – This is when a legitimate customer makes a purchase but later disputes it as fraudulent. For example, they claim the purchase was unauthorized or that the item arrived damaged. Friendly fraud is common when buyers regret a purchase or want to avoid paying.

The Cost of Credit Card Fraud for Small Businesses

When a fraudulent purchase occurs, the costs don’t fall on the credit card company or bank. Instead, they often fall on the small business that accepted the fraudulent transaction. Here are some of the potential costs:

  • Chargebacks – This is when the credit card network reverses a transaction after a fraud claim. The business loses the sales revenue and may also face a chargeback fee of $15-$100 per transaction.

  • Fines and fees – If chargebacks exceed 1% of their total transactions, businesses can face non-compliance fines and fees from card networks. These can add up to thousands of dollars per month.

  • Lost inventory – Businesses lose the inventory purchased with fraudulent transactions. Stolen card fraud in particular leads to inventory loss.

  • Increased processing fees – High chargeback rates can cause credit card processors to increase fees. Processors may even terminate accounts altogether.

  • Lost time – Dealing with fraud claims and chargeback disputes takes up valuable time. This pulls the business owner away from growing their business.

  • Reputational damage – Excessive disputes and fraud could harm a business’s reputation with the card networks and banks. This could make it harder to get approved for merchant accounts.

How Credit Card Fraud Insurance Works

Credit card fraud insurance provides financial protection by reimbursing some costs associated with fraud. Policies vary, but may cover:

  • Chargeback fees
  • Chargeback labor costs
  • Lost revenue from fraudulent transactions
  • Cost of stolen inventory
  • Liability costs from banks
  • Expenses to defend chargebacks

Insurance can provide vital protection, especially for new companies with limited resources. But it’s important to understand fraud insurance limitations:

  • It does not cover 100% of fraud costs. There are caps on claim amounts.
  • Friendly fraud is often excluded from coverage.
  • Pre-authorization is often required for large purchases.
  • Extensive paperwork is required to file claims.
  • Complex fraud may not qualify for reimbursement.
  • Premiums and deductibles apply.

6 Tips for Choosing Credit Card Fraud Insurance

If you decide fraud insurance is right for your business, here are some tips for choosing the right policy:

1. Review coverage exclusions

Read the fine print to understand exactly what is and is not covered. Pay particular attention to friendly fraud and pre-authorization exclusions.

2. Look for broad coverage

Find a policy that covers more than just inventory costs. Look for coverage of fees, fines, labor costs, liability claims, and lost profits.

3. Seek out reputable providers

Work with established insurers and avoid providers you aren’t familiar with. Ask providers for customer referrals.

4. Compare premiums

Premiums are typically 1-5% of gross credit card sales. Get quotes from multiple providers to find competitive pricing.

5. Evaluate claim support

See what support the insurer provides for filing and documenting claims. Look for streamlined paperwork and fast reimbursement.

6. Review limits and deductibles

Make sure limits and deductibles align with your business’s fraud risk and financial resources. Avoid caps below your average order values.

Fraud Prevention Comes First

The most cost-effective way to deal with credit card fraud is to prevent it in the first place. No insurance policy can completely protect your business. Before getting coverage, implement fraud prevention tools:

  • Use EMV readers – EMV chip cards create unique transaction codes to prevent counterfeits. Swiping strips leaves you liable for fraud.

  • Require signatures – Get signatures for in-person purchases as an authorization backup.

  • Use address verification – Verify billing address matches the card issuer’s records.

  • Monitor transactions – Watch for suspicious patterns like large orders or frequent purchases.

  • Delay shipping – Hold off shipping for 1-2 days to allow fraud monitoring on large or risky orders.

Fraud Insurance Can Fill Protection Gaps

Even with good fraud prevention, your business can still experience hits from determined criminals. Well-designed insurance can help cover blind spots in your fraud tools. Policies with comprehensive coverage, reputable underwriters, streamlined claims, and deductibles scaled to your business can provide an added layer of financial protection against credit card thieves.

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Is there insurance for credit card fraud?

Given that federal law limits credit card fraud liability and that most credit cards offer a “Zero Liability” policy, credit card loss protection insurance doesn’t offer any additional benefits. Not only is it unnecessary, it’s also a waste of money.

How can a business protect itself from credit card fraud?

Require Additional Verification You can do this by asking for identification if someone’s trying to make a purchase without having logged into an account, or by verifying their billing and shipping address to ensure they match against the information on the credit card.

Do credit card companies offer fraud protection?

In most cases, any fraudulent purchase made on a covered credit card is protected by zero liability no matter the size and no matter how the purchase was made (in-person or online). It’s up to the credit card holder to report fraudulent charges to their credit card issuer as soon as the charges are discovered.

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