Square could be on hook for millions in chargebacks

On June 26, 2015, Creative Creations Omaha owner Patricia Urbanovsky turned herself into local law enforcement after being charged with three felony counts of theft in connection with the sale of worthless travel vouchers. Investigators revealed that three former employees accrued $141,000 in personal credit card charges on behalf of Urbanovsky after she exceeded her own credit card limits to run the voucher scheme.

While Creative Creations has operated as a legitimate wedding and event planning and rental business, Urbanovsky apparently took a wrong turn when she allegedly created a nonexistent employee at Southwest Airlines to contract with for reduced airfare vouchers, which were subsequently resold to the public.

Starting in March, complaints surfaced that vouchers purchased through Creative Creations had not been funded for redemption. The Better Business Bureau said it received more than 1,500 public complaints involving about $1.3 million.

A number of consumers also disputed the voucher charges when Creative Solutions failed to pay out. San Francisco-based Square Inc. indicated that it had paid approximately $2.8 million in chargebacks as a result of disputed voucher charges. Square filed a criminal report against Urbanovsky, who is known to have opened an account with Square in October 2014.

Warning signs ignored?

Although businesses like Creative Creations may appear legitimate on the surface, payment processors must continuously monitor merchant activities. According to Monica Eaton-Cardone, co-founder and Chief Operating Officer at Chargebacks911, one way to prevent fraud by merchants who engage in consumer scams is to adopt a two-pronged approach.

The first step is to exercise consistent and thorough due diligence when boarding new merchants. "Before a merchant receives a credit card processing account, not only should their paperwork be validated, but human contact points should also be tested and verified – such as checking the business directory for a matching listing, calling the customer service phone number to test competency and using any website contact form to test the response," Eaton-Cardone noted.

The second step is to monitor the merchant's dispute reasons and chargeback trends, since heightened chargeback activity may signal a problem merchant. Even then, merchant fraud detection is a delicate matter. "Unfortunately, merchants who aim to scam consumers may pass these tests with flying colors," Eaton-Cardone said. "Fortunately however, this is where monitoring chargeback statistics is most valuable."

Monitor for red flags

She advises payment processors to monitor merchants when suspicious activities occur that could signal increased risk is just around the corner. Following are several red flags payment processors should not ignore:

• Abnormal increase in chargeback quantities
• Spiked sales activity inconsistent with previous patterns
• Abnormal ticket values that are higher or lower than previous averages
• Reduced time-frame between chargeback post date and transaction date of claim
• Disconnected customer service line or not answering calls during normal business hours
• Failure by merchant to dispute their chargebacks
• Heightened number of consumer complaints

Authorities involved in the Creative Creations case are continuing their investigation of Urbanovsky, who could face prison time if felony charges brought against her are deemed valid and enforced.

Editorial Note:

Whether you want to upgrade your POS offerings, find a payment gateway partner, bone up on fintech regs or PCI requirements, find an upcoming trade show, read about faster payments, or discover the latest innovations in merchant acquiring, The Green Sheet is the resource for you. Since 1983, we've helped empower and connect payments professionals, starting with the merchant level salespeople who bring tailored payment acceptance and digital commerce tools, along with a host of other business services to merchants across the globe. The Green Sheet Inc. is also a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals.

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