What is Chargeback Fraud?

Sandra Wrobel-Konior October 6, 2020

Chargebacks are a fast-growing threat, especially when they are used by customers with malicious intent. What is chargeback fraud, how can you fight back, and what can you do to mitigate the number of customers issuing such chargebacks?

Chargeback fraud is a chargeback issued as the fraudulent request for a return—the cardholder’s intention is to keep the ordered item and get a refund. It’s similar to friendly fraud, which occurs when a cardholder disputes a legitimate charge. Some use these terms interchangeably. Chargeback fraud makes up to 35.5% of all chargebacks.

There’s also a type of hostile fraud that is considered chargeback fraud. This type is when a person misrepresents themselves as a customer or cardholder to gain a financial advantage. Hostile fraudsters usually target items with high resale value or that can be quickly converted to cash.

As you can see, customers with bad intentions take advantage of their right to file chargebacks so that they can obtain items or services at no cost.

Why customers file chargeback fraud

The most common reasons fraudsters use when filing a fraudulent credit card chargeback are:

• The product or service wasn’t delivered
• The original transaction wasn’t authorized by the cardholder
• The product or service wasn’t as described.

The least pleasant consequences associated with chargebacks are related to a loss of money, especially in amounts that go beyond the cost of the items or services. These additional amounts could be shipping costs and processing fees. Plus, chargeback fees will be levied against the company, not to mention the time you need to dispute the chargeback. According to Chargebacks911, companies lose an average of $ 2.94 in revenue for every dollar lost to fraud.

How you can prevent from chargeback fraud

Chargebacks can quickly get out of control, so you need to act fast to keep your merchant account in good condition. Here’s what you can do to help stop chargeback fraud.

Use relevant transaction descriptors

Transaction descriptors (the business name that appears on your customers’ credit card statement to help them identify the transaction) need to be complete and match your company or the items the customer receives. If you don’t provide relevant details, it may cause a customer to dispute a charge because of a misunderstanding or because they don’t recognize the charge.

Offer responsive customer support

Your contact information should be visible to website visitors, and you should allow customers to contact you directly if something is wrong with their order. Their issues should be addressed promptly—customers who know the status of their inquiries are less likely to issue a dispute. If possible, provide 24/7 customer service. If you are unable to do that, clearly state the support hours on your website with information about the approximate timeframe for addressing customer inquiries.

Keep in mind that only 4% of dissatisfied customers will contact a merchant, while 96% carry a risk of filing a chargeback. Make sure you have processes in place to build relationships with customers. When they feel more comfortable with you, they will be more loyal and less likely to start a dispute.

Write a clear return policy

Your refund and return policies should be easy for website users to find and understand. Provide detailed information on how customers can return items and how to request a refund. Plus, think about offering a refund when a customer isn’t satisfied with an ordered product.

Use 3D Secure authentication

3D Secure authentication gives your business an extra layer of security because it shifts the liability from the merchant to the issuing bank. Customers need to confirm transactions with a code. In the case of a chargeback, the issuer takes responsibility and needs to cover the costs.

Provide shipping and tracking info

Customers should always be updated about where their package is, so don’t forget to provide shipment tracking information. If you know about any delays, inform the customers as quickly as possible or provide an alternative solution.

Use a reliable payment provider

When finding a payment processor to work with, choose one that has fraud detection features in place and monitoring services that go beyond the basics. Another thing to consider is the ability to manage disputes through your payment platform and set advanced rules that let you control charges.

Disputes need to be resolved in a timely manner. That’s why you should document every conversation with your customers, monitor orders with past fraudulent activities, and keep detailed records of all transactions so that you can quickly recognize patterns. It will be also easier to gather evidence.

Use multilevel protection

Multilevel security with a complete set of anti-fraud tools will help you fight back effectively. Using technology with multiple data points enables you to assess the risk of the transaction.

You need at least the most basic level of security, such as CVV, an address verification service (AVS), and geolocation solutions. But that’s not enough when it comes to chargeback fraud. Ask your payment provider for advanced security tools that will increase your ability to keep your finger on the pulse. You need not only 3D Secure authentication but also machine learning and AI-based solutions with dynamic rules that adjust to your industry.

Watching customer behavior can help you avoid many chargebacks. Make sure you do everything in your power to improve outcomes.

Take control of chargebacks

The increased popularity of online shopping has allowed some consumers to abuse their rights in tricky ways. At the same time, merchants have limited ways to fight back. They can challenge chargebacks, but they need to gather strong evidence to win the dispute. Also, they can do nothing to stop customers from issuing chargebacks repeatedly.

The good news is that the revenue lost to chargeback fraud can be recovered. That’s why collecting all data and documents regarding each charge is so important. Businesses need to monitor their chargeback rates. The good news is that credit card processors usually have monitoring programs in place, so you’ll be notified if anything happens.

Keep in mind that sometimes it’s better to refund the customer instead of disputing a chargeback, especially when the chargeback amount is small. But always monitor the number of chargebacks filed against your business to make sure that your account won’t be penalized. If you’re working with the right payment provider, you’ll be informed about any critical situation.

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