Today, many small businesses sell their products online. An order comes in, you run the cutomer's credit card, payment is approved, and you ship the item. To this point everything appears to be in order. But then, when your bank reverses the deposit, and takes the money out of your account, maybe a day, a week, a month or even several months later, you find out that you paid with a stolen credit card. You think, isn’t this be the bank's responsibility to make sure the card is good? From cases we've seen, it is not. And insurance won't help you either, for an exclusion known as "voluntary parting".
We assisted a customer of ours who had a payment denied for a large order shipped six months earlier. Evidently the owner of the card was someone who didn’t pay close attention to her purchases, and hadn’t notice the charge for over six months. Finally, she noticed that a 5-figure charge was made to her card a half year earlier and contacted her bank. Indeed the charge was bogus, and the bank credited her account accordingly. That's when our customer noticed the same amount withdrawn from their corporate checking account. What was not a particularly noteworthy transaction for the woman whose card was charged, it was a big number for this business. They called the bank whose representative referred them to the bank agreement. The agreement was written by the bank, by well qualified attorneys, to protect the bank's interests for any acts of fraud. How well it protected the bank was remarkable: the bank indeed had the expressly stated right to withdraw, without notice, the full amount of the transaction made on the stolen card. Naturally, our customer hoped she had insurance for this loss. But insurance was no help either. This transaction is what insurance companies refer to as "voluntary parting".
Remember back to when you were ready to buy a car, and the salesman would give you the keys and say, “Take her for a spin”? Those days are long gone. Why? Because some people would take the car for a spin, and never return. Because the salesperson voluntarily gave up the keys, the car was not stolen: no theft, no insurance coverage. Being duped for sending product to a location far away falls onto this same category, the product was not stolen; no insurance coverage.
This scam has become more common lately. The bank accepts a card, the product is shipped, and at some point later on, the bank takes the money back. The banks and insurance companies want nothing to do with absorbing this loss, and write their contracts accordingly.
A tragic after-story to the first customer described here: several months after having the money taken from their bank account, they got another order from the same company at the same address in California. They had already contacted the police in California when the scam first happened, and neither the local or state police said they could do anything about it, as it was probably a fake business or address. But now they had the same company, operating from the same address, trying to take another shot at scamming our customer. They called the local and state police again and were told they had to elevate to the FBI, since this was an interstate commerce fraud. When they contacted the FBI, they were told that the FBI only got involved with scams over $200,000. I also spoke separately with a friend who is an FBI agent and he confirmed that they only have resources for the big fraud cases.
The small business takes the hit from the fraudsters, and can’t get help from big financial companies or their government. Further research suggests that one solution is Pay Pal. We have found that more and more small businesses selling and shipping property prefer the small fee that PayPal charges is well worth it. We use our Pay Pal account for some of the few services we buy non-locally.
Bottom line, be ever watchful when you take your first order from a big customer who is in a rush. It could wellbe a scam where there's no insurance to back you up.