Grocery Fraud

Grocery retailers deal in high transaction volumes and serve every customer demographic imaginable. A business model like that will bring you face-to-face with the full spectrum of payment challenges, including fraud and chargebacks.

While losses from things like spoilage and shoplifting sometimes have be factored in as inevitable, fraud is a different kind of problem that can lead to serious revenue loss and carry other negative consequences that no merchant can afford to simply write off as just another cost of doing business. What should grocery stores be doing to prevent fraud and reduce their chargeback rates? 

Meats, produce, and other grocery store staples can’t be warehoused and shipped as easily as things like books and shoes. For a long time, grocery stores were able to retain their traditional model even as other retail sectors were dramatically transformed by the advent of e-commerce. 

All that changed during the COVID-19 pandemic, when grocery stores were forced to adopt practices like online ordering, delivery, and curbside or in-store pick-up in order to accommodate safety mandates and cautious shoppers. For the most part, these new habits are here to stay, with online grocery sales expected to grow by more than 11% per year over the next five years. 

The trouble with a sales model that resembles e-commerce is that you also invite some of its negative aspects, which includes greater exposure to incidents of fraud and the chargebacks that inevitably follow them. 

Here’s what you can do to lower your fraud risk and protect your revenue. 

What are the Various Types of Grocery Store Fraud? 

While the introduction of the EMV chip has made card-present fraud much less frequent at grocery stores and other in-person retailers, grocery stores are still vulnerable to a number of schemes and attacks. 

Account Takeover Attacks: If your store offers online customer accounts that accumulate reward points or store payment credentials, it’s a sure bet that fraudsters will try to hack into these accounts in order to spend other peoples’ points or money on themselves. 

Cybercriminals usually gain access to customer accounts through phishing schemes and social engineering, tricking their targets into willingly sharing their passwords. However, it is also possible for them to brute force their way into an account by guessing passwords or exploiting software vulnerabilities. 

First-Party Misuse: Commonly known as “friendly fraud,” this involves seemingly ordinary customers making a purchase with their own card, then disputing it for false or erroneous reasons later. They may do this out of buyer’s remorse, genuine confusion, or a premeditated intention to defraud the merchant. 

Delivery, curbside pickup, and BOPIS (buy online, pick-up in store) orders are particularly susceptible to first-party misuse, because it is often very easy for customers to make unfalsifiable claims that their order was given to the wrong person or prepared incorrectly. 

True fraud: Merchants who make proper use of EMV terminals are protected from liability when card-present fraud occurs, but if you allow customers to pre-pay for grocery orders online, you remain vulnerable to card-not-present fraud, which is much harder to prevent. 

Grocery stores are a common target for “card testing,” which is when a fraudster tests the functionality of a stolen card by trying to make a small, easy-to-overlook purchase. If the transaction goes through, they know they can use the card to make a larger, more significant purchase elsewhere. While the purchase amount may not be very much, card testing chargebacks carry the same high fees and detriments as any other chargeback. 

Why are Fraud and Chargebacks Such a Big Problem for Grocery Stores? 

One of the biggest problems with fraud—whether it’s true fraud or friendly fraud—is that if you don’t take action to stop it, recurring attacks can start to spiral out of control. There are also consequences beyond just the loss of revenue. 

Fraudsters always take the path of least resistance, and when they discover that they can get away with targeting a particular merchant, they will retarget that merchant over and over.

This leads to increasing rates of fraud and chargebacks, which also come with costly fees. A $5 fraudulent transaction can easily end up costing you $25 in lost revenue and fees. 

To make matters worse, card networks monitor merchants’ fraud and chargeback rates. If you carry an excessive rate for too long, you can be penalized with fines, restrictions, and even the loss of your merchant account. 

For all of these reasons, it is important to have a comprehensive strategy for preventing fraud and chargebacks. 

How Can Grocery Retailers Prevent Fraud and Fight Back? 

Grocery stores can protect themselves from fraud by implementing effective anti-fraud tools, following best practices for safe delivery and BOPIS, and making appropriate use of the chargeback representment process. 

Technology is your best friend when it comes to stopping account takeover and true fraud. Strong password requirements and multi-factor authentication protocols can protect customer accounts from unauthorized use. Authentication tools like 3-D Secure can also make online credit card transactions safer, along with fraud filters that use AI and other sophisticated techniques to identify suspicious transactions. 

Delivery and BOPIS services are exploited by true fraudsters and friendly fraudsters alike. Always check the ID of the person picking up an order, or ask them to display the confirmation screen on their device. This can prevent thieves from stealing other people’s orders, and can be used as evidence when you have to fight back against first-party misuse. 

Fraudulent chargebacks are hard to anticipate ahead of time, but you can get them reversed if you have evidence that refutes the cardholder’s false claims.

This process is called chargeback representment, and it involves a resubmission of the original transaction along with the documents that comprise your compelling evidence. Be sure to keep copies of transaction receipts and delivery confirmation in case you need them for this type of scenario. 

Conclusion 

Grocery shopping has changed a lot in the last few years, but some of the innovations that have made life easier for consumers have brought on new challenges for merchants, including increased risk of fraud. 

By following best practices, implementing the right tools, fighting back when you can, and asking for expert help when you need it, you can keep your store safe from the worst excesses of payment fraud and misuse of the chargeback process.

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