How to Prevent Chargeback Fraud: Criminal, Friendly Fraud and Merchant Errors

If a company wants to avoid payment disputes and keep great customer relationships, chargeback prevention is the way. Merchants just need to find the best strategy for their business. In this regard, we will go through how to prevent chargebacks online, look at how they can impact the merchants’ revenue, and share details about the available tools.

What Is Chargeback

Chargeback is a refund initiated by the client’s issuing bank. The procedure was initially intended to protect the buyer and ensure the security of online card payments. It differs from a regular refund, i.e., when the buyer contacts the seller to return the money due to a faulty product, long delivery time, etc.

The customer goes directly to their bank with a chargeback, skipping communication with the seller. Therefore, it is crucial to prevent chargebacks because if the issuing bank finds the arguments of its client convincing, it will write off the disputed amount from the seller’s account.

As stated by VISA, from March 2020 to March 2021, the number of payments on the Internet increased by 39%. The volume of online transactions is growing, increasing the number of chargebacks alongside. According to Solid research, approximately 0.15%-0.17% of all transactions on the Internet end up as chargebacks.

Why Do Chargebacks Occur?

Chargebacks can be categorized into main types: fraud (criminal and friendly fraud) and merchant errors (authorization, processing errors and common customer disputes). Fraud, including true fraud (transactions on stolen cards) and friendly fraud, accounts for about 75% of chargebacks. Friendly fraud occurs when a buyer intentionally misuses the dispute system or tries to obtain products or services for free.

Customer disputes make up approximately 20% of chargebacks, often resulting from issues with product quality, delivery, customer support, or subscription transparency. Authorization and processing errors make up the remaining 5%. The distribution of these categories may vary by industry, region, and individual issuing banks.

Buyers often turn to banks for refunds when they are dissatisfied with a purchase or want a faster resolution than dealing with the seller. Banks generally side with the customer, especially in the United States, to maintain a positive relationship and because credit cards are popular. Banks receive commissions for each chargeback and have an interest in recovering credit funds promptly.

How Does Chargeback Fraud Hurt Business Owners?

Chargeback at the client’s request is routine for issuing banks, but numerous occasions can lead to severe problems for the seller and their business. International payment systems (e.g., VISA, MasterCard, Amex, JCB, etc.) watch over the number of chargebacks a business receives. Exceeding the limit threatens the company with additional losses and getting denylisted by banks. Indeed, many entrepreneurs are asking how to avoid chargebacks and mitigate these risks, and our article aims to answer this very question.

Online stores with high chargeback rates are considered unreliable by payment systems and should consider implementing a chargeback prevention strategy. Visa and MasterCard will be concerned if a business has more than 100 chargebacks per month, and together they comprise more than 0.9% of the total number of transactions.

It is always a problem for a business. Not only because of the transaction amount but also because the fee will be written off from the account. Often, the fees can be higher than the transaction itself when it comes to purchases under $30. In addition, a business with a growing number of chargebacks is receiving increased attention from the acquiring bank and payment systems. When the chargeback ratio is high, the system marks the company as a high-risk client. If a business cannot reduce this figure, it will end up on the MATCH list, an industry’s denylist, and the bank can close the seller’s account.

The only way to get off the list is to prove that the seller got there accidentally. For example, a sudden increase in the chargeback rate was associated with fraudulent actions of buyers. In practice, this isn’t easy, so it is better not to get denylisted. However, if the company is already marked as high-risk, the seller needs to reduce the chargeback ratio and get out of the monitoring program.

Chargeback Prevention

Chargebacks are a growing concern for businesses, resulting in financial losses and operational challenges. Two main types of chargebacks are friendly chargebacks, arising from misunderstandings or customer dissatisfaction, and criminal chargebacks, initiated by fraudsters exploiting payment system vulnerabilities. To combat these, businesses should improve communication and implement fraud detection technologies and authentication protocols. Merchant errors, such as processing mistakes or shipping discrepancies, also contribute to chargebacks. 

By streamlining internal processes, enhancing quality control, and providing excellent customer service, businesses can minimize these errors and strengthen customer relationships. Effective chargeback prevention strategies are crucial for businesses of all sizes in today’s dynamic commerce landscape.

How to prevent friendly fraud

Friendly fraud presents a distinct challenge for businesses, as customers unintentionally initiate chargebacks due to misunderstandings or dissatisfaction. To safeguard revenue streams and maintain positive customer relationships, implementing effective prevention strategies is crucial. This concise guide offers valuable insights and actionable tips to help businesses proactively prevent friendly fraud and mitigate its impact.

Ensure Transparency in Return, Refund, and Cancellation Policies

Transparency is key when it comes to preventing friendly fraud chargebacks. Clearly communicate your return, refund, and cancellation policies to customers, making sure they understand the terms and conditions. By providing a clear understanding of what can be expected in these situations, you can reduce the likelihood of customers resorting to chargebacks due to confusion or dissatisfaction.

Provide Contact Information: Email and Phone Support

Make it easy for customers to get in touch with you by providing accessible contact information such as email and phone support. Promptly addressing customer inquiries and concerns can help resolve issues before they escalate to chargeback levels. By demonstrating your willingness to assist and communicate, you create a positive customer experience that discourages chargeback disputes.

Track Shipments and Delay Billing with Insurance or Confirmation

Using shipping insurance or confirmation services can provide valuable proof of delivery and help prevent friendly fraud chargebacks. By tracking shipments and ensuring their successful receipt, you can address any claims of non-delivery or unauthorized purchases. Delaying billing until after the expected delivery date adds an extra layer of protection, as customers are less likely to initiate chargebacks out of impatience or misunderstanding.

Assess Transaction Appearance via Mystery Shopping

To better understand how your transactions appear on credit card statements, consider conducting mystery shopping exercises. Place test orders and analyze the resulting transaction information. By experiencing the customer’s perspective, you can identify any inconsistencies or confusion that may lead to chargebacks. Making necessary adjustments to ensure clear and recognizable descriptors can help prevent chargebacks resulting from customer confusion.

Verify Customer Orders for Accuracy

Implement a verification process to ensure the accuracy of customer orders. Send order confirmation emails or messages that clearly state the details of the purchase. This not only serves as a record of customer consent but also reduces the risk of chargebacks based on claims of unauthorized transactions. By confirming orders, you establish a stronger foundation for preventing friendly fraud chargebacks.

Effectively Manage Recurring Payments

For businesses offering recurring payment services, proper management is crucial to prevent friendly fraud chargebacks. Ensure that customers are informed and have given explicit consent for recurring charges. Keep accurate records of customer agreements and regularly review and update billing information. By managing recurring payments effectively, you can reduce the risk of chargebacks stemming from misunderstandings or unauthorized transactions.

Regularly Update Expired Cards

Stay vigilant and regularly update expired card information to prevent friendly fraud chargebacks. Outdated card details can lead to unintentional chargebacks when customers are unaware of the need to update their information. By proactively reaching out to customers to update their card details, you can minimize the occurrence of chargebacks resulting from expired cards.

Transparent Free Trials without Hidden Charges

If you offer free trials, ensure transparency by clearly outlining any associated terms and conditions, including potential charges beyond the trial period. Avoid hidden fees or unclear billing practices that may lead to chargebacks resulting from customers feeling misled. By setting clear expectations and providing transparent information, you can reduce the risk of friendly fraud chargebacks during free trial offers.

Display Your Company Name on Credit Card Statements

To prevent customer confusion and potential chargebacks, make sure your company name is clearly displayed on credit card statements. Customers should be able to recognize the charge and link it to their purchase without confusion. By ensuring your company name is visible, you help customers identify legitimate transactions and minimize the likelihood of chargebacks initiated out of uncertainty or suspicion.

Leverage Payment Provider Support for Assistance

In case of any challenges or concerns related to friendly fraud chargebacks, don’t hesitate to seek support from your payment provider. Payment providers often have resources, tools, and expertise to help businesses combat and prevent chargebacks. By leveraging their assistance, you can access valuable insights and guidance tailored to your specific circumstances, further strengthening your chargeback prevention efforts.

How to Prevent Criminal Fraud

In the ever-evolving landscape of commerce, criminal fraud poses a significant threat to businesses. Criminal fraud occurs when fraudsters exploit vulnerabilities in payment systems, utilizing stolen credit card information or engaging in identity theft to carry out fraudulent activities. To protect your business and customers from these illicit activities, implementing effective prevention strategies is crucial. 

Secure Card-Present Transactions with Customer Signatures

For card-present transactions, ensuring security is vital in preventing criminal fraud chargebacks. Always obtain customer signatures as proof of their consent and verification of the transaction. This provides an additional layer of protection and reduces the risk of fraudulent claims or unauthorized chargebacks.

Enhance Security for Card-Not-Present Transactions with Address Verification Services (AVS)

Card-not-present transactions, such as online or over-the-phone purchases, require heightened security measures. Implementing Address Verification Services (AVS) helps validate the customer’s identity by cross-referencing the provided address details with the cardholder’s information. By utilizing AVS, businesses can mitigate the risk of criminal fraud chargebacks associated with unauthorized or fraudulent transactions.

Prioritize Payment Security for Online and In-Person Transactions

To prevent criminal fraud chargebacks, businesses must prioritize payment security for both online and in-person transactions. Implementing robust encryption and secure payment gateways for online transactions, along with implementing EMV chip technology for in-person transactions, helps protect against fraud and reduces the risk of chargebacks resulting from criminal activities.

Utilize Strong Authentication Measures for Added Protection

Incorporating strong authentication measures adds an extra layer of protection against criminal fraud chargebacks. Implement multi-factor authentication, such as requiring unique passwords, biometric verification, or one-time passwords (OTP), to ensure the rightful cardholder is initiating the transaction. By implementing these measures, businesses can significantly reduce the risk of fraudulent activities and associated chargebacks.

Implement Real-Time Fraud Decisioning to Detect and Prevent Criminal Chargeback Fraud

Real-time fraud decisioning systems can effectively identify and prevent criminal chargeback fraud. By utilizing advanced fraud detection technologies and machine learning algorithms, businesses can detect suspicious transactions in real-time, enabling them to take immediate action to prevent fraudulent chargebacks. This proactive approach helps businesses safeguard their operations and finances against criminal fraud and mitigates the impact of chargebacks resulting from fraudulent activities.

How to Prevent Merchant Error

Merchant errors can inadvertently lead to chargebacks, causing financial losses and customer dissatisfaction. To mitigate these risks, it is crucial for businesses to implement effective prevention strategies. This guide focuses on how to prevent chargebacks resulting from merchant errors, providing valuable insights and actionable tips to help businesses avoid common mistakes, enhance internal processes, and provide exceptional customer service.

Ensure detailed product descriptions and keep online inventory updated

To prevent chargebacks resulting from merchant errors, it is essential to provide detailed and accurate product descriptions on your website. Clear and comprehensive information helps customers make informed purchasing decisions, reducing the likelihood of misunderstandings or dissatisfaction. Additionally, regularly updating your online inventory ensures that customers have access to real-time availability, minimizing the risk of chargebacks caused by incorrect product information or out-of-stock items.

Utilize Clear Billing Descriptors on Customer Statements

Using clear and recognizable billing descriptors on customer statements is crucial in preventing chargebacks from merchant errors. Customers should be able to easily identify and associate the charge with their purchase, reducing the chances of confusion or potential disputes. By providing a clear billing descriptor, you enhance transparency and minimize chargebacks resulting from customers not recognizing or misunderstanding the transaction.

Avoid Processing Errors in Payment Amounts

One common merchant error that can lead to chargebacks is processing errors in payment amounts. It is crucial to ensure accuracy and precision when charging customers. Double-check payment amounts before processing transactions to prevent overcharging or undercharging, which can cause customer dissatisfaction and potentially result in chargebacks. By avoiding payment processing errors, you can maintain trust with customers and reduce the risk of chargebacks due to merchant mistakes.

Minimize Shipping Delays and Tracking Mix-ups

Shipping delays and tracking mix-ups can lead to customer frustration and, in turn, chargebacks. It is essential to prioritize efficient shipping processes, ensuring timely delivery and accurate tracking information. Proactively communicate with customers regarding any potential delays or issues, providing them with updated tracking details. By minimizing shipping delays and tracking mix-ups, you can reduce the occurrence of chargebacks resulting from customer dissatisfaction or concerns over non-receipt of goods.

Prevent Shipping the Wrong or Defective Items

Shipping the wrong or defective items can be a major cause of chargebacks. Implement quality control measures to minimize errors in order fulfillment and shipping processes. Double-check the accuracy of orders before shipment and conduct regular inspections to ensure the quality and condition of products. By preventing the shipping of incorrect or defective items, you can significantly reduce the risk of chargebacks resulting from customer dissatisfaction or claims of receiving unsatisfactory goods.

Chargeback Fraud Prevention Tools

A fraud prevention tool is a system, program, or software developed to allow merchants to detect and prevent theft from occurring in the first place. This tool can function well by analyzing transaction and customer data using several indicators and machine learning.

Chargebackhit offers a comprehensive chargeback prevention service, utilizing data from client orders to provide detailed information to the bank and resolve disputes. Strategies for reducing chargebacks include implementing prevention tools, combating friendly fraud, improving order fulfillment processes, eliminating merchant errors, and practicing honest marketing.

Merchant error prevention involves implementing clear policies and procedures to minimize flaws in operations. Additionally, having transparent and accurate marketing strategies is crucial. Tools such as cardholder identification systems (AVS, CVV, 3DS2, and VAU) and alert services can help prevent chargebacks by identifying suspicious transactions and providing early notifications.

Chargebackhit offers the latest technologies embedded in the Visa payments network ecosystem, including Rapid Dispute Resolution (RDR) that replaces chargebacks with automatic refunds. However, it is important to choose a payment provider that offers these services. Combating friendly fraud requires proving that the chargeback is misplaced, utilizing evidence such as user website activity or delivery service information.

Maintaining effective order communication, providing tracking numbers, and keeping customers updated throughout the delivery process can also help prevent chargebacks. Overall, having a strong chargeback prevention service and employing the right tools and strategies are crucial in combating the increasing number of chargebacks in online transactions.