Chargeback fraud is a bit different from other types of fraud because it doesn’t happen at the point of purchase. Instead, it happens after the purchase has already been made.
Some companies may fight chargeback fraud after it happens. But, again, most don’t have the resources to make going after individual fraudsters worthwhile. So how to prevent chargeback fraud starts with securing a marketplace’s purchase and return processes so that chargebacks don’t happen at all. Here are some ways to do that.
Implement Robust Credit Card Verification Systems
Avoiding chargebacks related to criminal fraud comes down to being able to determine if a credit card transaction is fraudulent before it goes through. That means using identity verification and fraud detection tools, including things like the Address Verification System, to make sure credit cards and their details are being used by their rightful owners. It’s much more efficient to block a fraudulent transaction before it happens than to negotiate a chargeback with a victimized customer afterwards.
Flag Unusual Transactions
In some chargeback fraud cases, fraudsters will attempt to buy large quantities of items – or make repeated small quantity purchases – with the intention of filing chargebacks over them later. In the meantime, they often resell these items, allowing them to profit at a merchant’s expense if the chargebacks go through.
Even if these kinds of transactions are made legitimately (though they often aren’t), they can still be used to commit fraud. That’s why businesses should have tools for things like suspicious activity monitoring and link analysis to look for atypical shopping patterns and block them before they result in chargeback fraud.
Establish Clear Policies and Communications
Friendly fraud tends to happen for a few key reasons. One is that a customer doesn't recognize a charge on their credit card statement because a merchant doesn't describe themselves or the transaction very clearly. Another is that a merchant’s return process is ambiguous or convoluted, so a customer thinks filing a chargeback will be more convenient.
Therefore, a big part of avoiding friendly fraud is open communication with customers. Businesses should write billing descriptions to correspond exactly to the business’s name, and to the nature of the specific transaction if possible.
They should also form clear return policies that are succinct, publicly accessible to users on the business website, and automatically attached to purchases. Finally, businesses should make methods of getting in contact with them available and obvious if customers have questions about orders.
Log Evidence of What Happened During a Transaction
Both friendly fraud and chargeback fraud happen when customers claim that something didn’t happen with a transaction when it actually did (or vice-versa). That’s why it’s important for businesses to create records of transactions: so they have evidence on their side in the case of a dispute.
A common example is to automatically send a receipt email to a customer after they make a purchase. Another is to hire a package tracking service that shows customers where their orders are in real time, and requires proof of delivery. These measures and others serve as chargeback fraud protection in case a customer claims they never made an order or never received it.
Consider Using a Chargeback Guarantee Solution
Some merchant service providers offer a fraud detection chargeback guarantee. This means that they take full responsibility for monitoring for behaviors that may be indicative of chargeback fraud. And if they miss something that leads to an illegitimate chargeback, then they pay the associated financial costs instead of the merchants.
This can be useful for smaller businesses, especially ones that can’t (or don’t want to) pay for a dedicated risk management team and so might be more vulnerable to chargeback fraud. For larger businesses, a model that might work better is paying microfees for checking only those transactions that a risk team identifies as suspicious.
FAQs
Chargebacks are mostly prevented by declining risky orders or through improved customer service. Depending on the vendor, services can include various features such as real-time fraud screening and customer dispute resolution.
How common is chargeback fraud? ›
There are other false claims consumers might make but these tend to be the most popular. On average, chargeback impacts 6 in 1,000 transactions. A 1% chargeback to transaction ratio is the maximum acceptable ratio for payment processors.
What are the three types of chargebacks? ›
Types of Chargeback Fraud
- Chargebacks from Criminal Fraud. Chargebacks from criminal fraud happen when a fraudster steals access to a credit card and uses it to make fraudulent purchases. ...
- Chargebacks from Friendly Fraud. ...
- Chargebacks from Merchant Error.
How Do You Fight Friendly Fraud Chargebacks? Collect your evidence, write a compelling rebuttal letter, and speak to the concerns of the issuing bank and the dispute the cardholder has raised. If the chargeback is friendly fraud, the issuing bank will have to decide based on the evidence.
Who pays for chargeback fraud? ›
If a dispute is raised by the cardholder and you as the merchant are found liable, you'll be required to pay the funds back to the cardholder, as well as any applicable chargeback fees. You can help to reduce chargebacks and protect your business from fraud by using the following guidelines.
How can return fraud be prevented? ›
Implement a return authorisation system.
Require customers to provide proof of purchase, such as a receipt or order number. This can deter fraudsters from attempting to return stolen or counterfeit items. This system can also help track returns and identify potential fraudulent activities.
How to prove chargeback fraud? ›
Compelling evidence can include delivery confirmation, purchase order information, and generally all records of the disputed transaction.
Who usually wins chargebacks? ›
Compelling evidence: If you have strong compelling evidence that shows the customer's dispute is unwarranted, then you have a good chance of winning the chargeback dispute and keeping the sales revenue (because the consumer won't receive the chargeback refund).
Is chargeback true fraud? ›
Chargeback fraud is intentionally triggering a fraudulent chargeback to recuperate the costs from a purchase when there wasn't a merchant error. True fraud is making a purchase with a stolen credit card that wasn't authorized by the cardholder.
How can I protect myself from chargebacks? ›
Ten ways to prevent chargebacks
- Make your return, refund and cancellation policies clear. ...
- Confirm customer orders. ...
- Provide good customer service. ...
- Use a clear billing descriptor on customer statements. ...
- Delay billing. ...
- Obtain proof of customer participation. ...
- Leverage Strong Customer Authentication rules.
In chargeback cases, the burden of proof falls on the merchant. In order to win back their lost revenue, the merchant must prove that their charge was authorized, and that the goods or services were delivered.
Why do merchants hate chargebacks? ›
Companies despise them for several reasons. They not only result in lost revenue but also involve additional fees, consume valuable time, and can damage the reputation of a business. Moreover, high chargeback ratios can lead to higher processing fees or even the termination of the ability to accept credit cards.
How can chargeback and fraud be prevented? ›
You can take several steps to combat chargeback fraud and minimize risks to your business: Use strong credit card verification methods. Implement automatic systems that check whether a customer's credit card billing address matches the one on file with the card issuer. If it doesn't, you can reject the transaction.
How do you respond to a fraud chargeback? ›
What should a chargeback response letter contain?
- Chargeback reason code. This will be referenced in the chargeback notice you received.
- Terms and conditions. ...
- Proof of delivery. ...
- A cover letter. ...
- Transaction information. ...
- Order details. ...
- Order history and customer service records. ...
- Images from your ecommerce site.
Each card network and issuing bank sets its own time limits for filing a chargeback, but U.S. law sets a minimum time limit of 60 days. Most banks give cardholders 120 days to dispute a charge.
How do you mitigate chargeback risk? ›
7 ways to reduce chargebacks
- Make it easy to submit refund requests and address them quickly. ...
- Respond promptly to chargeback requests. ...
- Make your product descriptions, shipping process and returns policy crystal clear. ...
- Check your billing descriptors. ...
- Send confirmation emails for each purchase. ...
- Make your payments secure.
Businesses can prevent chargebacks by implementing stringent security measures for online and in-person payments, clear return and refund policies, and excellent customer service. They can also use fraud prevention software, process transactions quickly and accurately, and keep detailed records.
How do you resolve chargeback issues? ›
To fight a chargeback, you need compelling evidence. Compelling evidence is documentation that proves the original transaction was valid or disproves claims made in the dispute process. If you have compelling evidence, you can and should fight. If you don't, you have a low probability of winning.
