Advertiser Disclosure

Over-the-Phone Credit Card Transactions: What Are the Risks?

May 6, 2014
Credit Card Basics, Credit Cards
At NerdWallet, we strive to help you make financial decisions with confidence. To do this, many or all of the products featured here are from our partners. However, this doesn’t influence our evaluations. Our opinions are our own.

If you’re a small-business owner, you may want to accept over-the-phone credit card transactions. It can boost sales, and customers often expect this payment option. But this type of payment can be risky for you and your clientele. Here’s a look at the risks associated with taking over-the-phone payments and how to mitigate them.

How does paying over the phone differ from in-person transactions?

In person, identification can be easily checked to verify the cardholder is, in fact, the actual cardholder. Also, swiping a credit card can show the vendor what the card number should be, and the vendor can ask the cardholder to see the last four digits.

This is important because often when card information is stolen, it’s skimmed from one card and put onto another card. If the card isn’t swiped, the vendor can’t see what the number is supposed to be, only whether there are enough funds on the card.

Businesses sometimes charge convenience fees when customers pay for goods or services over the phone. Why? Because there’s a greater risk. It’s easy to use a stolen credit card over the phone with no repercussions. If the fraudster gets called out on it, he or she can simply hang up.

How can I mitigate the risk of fraud?

Vendors can do several things to mitigate the risk of fraud occurring from manually entered transactions, according to Square.

  • Request the customer’s signature at time of delivery to make up for the lack of a signature at time of transaction.
  • Get all relevant information when taking down a customer’s credit card information — including card number, expiration date, CVV code and billing ZIP code. Also, make sure you get the customer’s name exactly as it appears on the card, including middle initial if applicable.
  • If your state allows it (California has restrictions), get the contact information of the cardholder in case there is an issue with the transaction.
  • Specify on the signature screen if the order was authorized by phone so you know the transaction was entered manually.

» MORE: How to Dispute Fraudulent Credit Card Charges

Anything besides fraud I should be worried about?

Customer disputes are another big concern associated with manual transactions. A customer dispute is when a customer believes he isn’t getting what he ordered at the terms he expected.

Disputes are more common with over-the-phone transactions because you aren’t dealing with the customer face-to-face. He isn’t seeing the product in person, and you likely haven’t built a personal relationship with him. Examples of customer disputes include:

  • Billing for goods or services without customer authorization.
  • Billing for goods or services before shipment.
  • Goods or services not being what the customer expected.
  • Dispute over refunds or returns between the customer and vendor.

To avoid customer disputes, describe the good or service in detail so the customer knows exactly what he’s getting, bill the customer after the order has gone through and shipped, and have a clear return policy. Disputes will likely happen — despite your best efforts to eliminate them — but try to curb them as much as possible.

Bottom line: Over-the-phone transactions are less secure and encourage more customer disputes. However, by offering the option, you’ll be able to accommodate a wider customer base. If you decide to allow over-the-phone or manual transactions, make sure to mitigate the risk of fraud and customer disputes as much as you can for your sake and the sake of your customers.

Phone image via Shutterstock