Most small business owners don't expect to become fraud victims
and they often don't know which fraud threats to guard against. But criminals
know that small businesses usually make the easiest targets, so every
small-business owner should have a clear understanding of the fraud landscape.
Here are three major types of fraud and how to protect your business.
fraud risks for small businesses
Insider fraud – – a scheme perpetrated by a company's employees
– is what many business owners are most concerned about. It's not the most
common type of fraud that small online businesses face, but it does happen and
can be very expensive.
The median loss for a single case of occupational fraud is
$150,000, according to 2016 figures from the Association
of Certified Fraud Examiners. That
figure is accurate for small businesses as well as enterprises, and in more
than 8% of cases, the victim companies were also required to pay a fine for
allowing the fraud to go undetected.
Those numbers mean SMBs are at disproportionate financial risk from
insider fraud like check tampering, payroll falsification, skimming, and simply
Resources to fight
- No matter how few employees your company has, these fraud
controls are important:
- Regular reconciliation of
your books and payroll records
- A way for employees to
report suspected fraud
- Proper employee training
- Random checks of accounts
and payroll records
You may also decide to hire an outside accountant and payroll
service rather than letting in-house employees handle those tasks. The Small
Business Administration recommends purchasing business fraud insurance to protect you from
occupational fraud losses.
Point-of-sale fraud risks for small
Many SMB owners remember the days when a counterfeited
mag-stripe credit card or a falsified paper check were big risks for
point-of-sale transactions. These days, real-time check verification and the
EMV liability shift have made it harder for crooks to use those tools. But EMV
card-fraud liability protection only helps your business if your POS terminals
are EMV compliant.
More than a year after the changeover in the US, only
38% of stores have switched to chip-card
terminals, meaning that they are financially liable for any POS card fraud that
happens in their stores. And as more businesses adopt EMV terminals, the
remaining unprotected merchants become bigger targets for POS fraudsters.
Resources to fight
SMB point-of-sale fraud
your business is not yet EMV compliant, make compliance a priority, especially
if you've been hit with POS fraud recently. Once you have EMV-compliant equipment
and follow the card companies' transaction security guidelines, your business
is no longer liable for card fraud that takes place on your terminals.
E-commerce fraud risks for small businesses
As POS fraud tools have improved, fraudsters have shifted their
focus on businesses that sell online. Typical scams include purchases made with
stolen credit card numbers and “friendly fraud” orders placed by customers
using their own payment data. In both cases, the transaction ends up being
charged back to the merchant, either by the victim of the card theft or the
“friendly” customer. E-commerce fraud costs online retailers more than 7%
of their revenue, according to Javelin
Strategy, in part because lost revenue isn't the only cost of online fraud.
Why is online fraud so damaging? When a merchant falls victim to
a fraudulent chargeback, they also pay a chargeback fee to their payment
processor. Too many chargebacks can raise the merchant's chargeback ratio,
which leads to higher processing costs and potential account cancellation if
the ratio rises too high or too fast.
As if that's not enough, online fraud causes another kind of
even more costly damage: false declines. Many times, online retailers tighten
up fraud screening after a spate of losses, but they use an incomplete tool set
or inflexible rules that end up screening out valid orders placed by real
customers. In 2016, Business Insider reported that US merchants were on track to falsely decline more than
$8.6 billion worth of valid orders. The cost of verified fraud during that
time? $6.5 billion. To add insult to injury, nearly 1/3 of falsely declined
customers choose never to shop with that merchant again – meaning every false
decline costs you not just a transaction but the entire potential lifetime
value (LTV) of that customer.
Resources to fight
ecommerce fraud and chargebacks
Online fraud is a complex, hard to detect and constantly
evolving type of crime with serious business consequences. Just as a small
business may decide to rely on the expertise of an outside CPA and payroll
processor, working with an independent fraud protection service may be the most
time- and cost-effective option. The ideal fraud protection service will offer
the latest technological tools to continually refine digital screening
parameters, human intelligence and skilled customer service to reduce false
declines, and a guarantee that the merchant won't be liable for any fraudulent
chargebacks that occur.
Setting up fraud controls and finding reliable outside providers
takes time, something many small business owners don't have enough of. But
protecting your business from insider, point-of-sale and e-commerce fraud is a
worthwhile and necessary investment.
Lourenco is the VP of US Operations at ClearSale, a Card-Not-Present fraud
prevention operation that protects e-commerce merchants against chargebacks.
The company’s flagship product, Total Guaranteed Protection, is an end-to-end
outsourced fraud detection solution for online retailers. Follow on twitter
at @ClearSaleUS or visit http://clear.sale/