Ins & Outs of Chargeback Fraud: Concise Actionable Guide

Nearly 90% of chargebacks you receive are cases of friendly fraud that originate with genuine cardholders. These claims can happen because of misunderstandings or come from customers who erroneously believe a chargeback is a legitimate (or faster) way to resolve the complaint.

An increasing number of cases involve customers lying to get merchandise for free. To be effective, merchants need a dynamic, multi-level chargeback fraud management strategy that addresses pre- and post-transaction fraud.

What is Chargeback Fraud?

Chargeback fraud occurs when a consumer requests the issuing bank to initiate a chargeback on an online purchase they made personally, claiming that a transaction was unauthorized or that they did not receive the goods or services they paid for.

This can happen even if the transaction was legitimate, and it can be costly for merchants, as they may be required to refund the transaction and incur additional fees.

When a client files a chargeback, the main aim is to receive a refund while keeping an item. The most common reasons for requesting a chargeback are:

• The buyers claim that they never received a product;
• They never authorized the payment;
• The shopper received the wrong item, and the buyer never answered their inquiries;
• The customer doesn’t recognize the purchase and billing descriptor.

The consumer intentionally opens a chargeback instead of reaching out to the business. Some buyers consider filing a chargeback an easier way to obtain a refund, but chargebacks are much more harmful to the company.

Are Chargeback Fraud and Friendly Fraud the Same?

The terms Chargeback Fraud and Friendly Fraud are often used interchangeably, but they don’t mean the same thing. The main difference between these terms is that chargeback fraud is an intentional action, while friendly fraud often occurs by a consumer’s mistake.

Customers who intend to commit a chargeback fraud usually wouldn’t contact the support service. They will mostly avoid any communication with the merchant, unlike those who engage in friendly fraud. The latter are inclined to communicate with the business and explain the reason for requesting a chargeback.

Is Chargeback Fraud Illegal?

Chargeback fraud can be considered illegal, as it involves making false claims to financial institutions to receive a refund or reimbursement for a transaction.

In many countries, making false claims to a financial institution is a crime punishable by fines or even imprisonment. Though, it’s often difficult for merchants and financial institutions to prove that a chargeback resulted from fraudulent actions rather than a misunderstanding (especially in cases of friendly fraud).

The Card Networks Policy governs both issuing and acquiring banks. Obviously, the card network is subjected to the law, but cases when the consumer faces legal action due to chargeback abuse happen quite rarely.

The reason is that tracking chargeback fraud requires the involvement of multiple local and government law enforcement agencies, and depending on the damages, a fraudster may be punished. However, the cost of judicial interference is high, often higher than that of products or services provided.

How can Merchants Prevent Chargeback Fraud?

Some buyers may file a chargeback against sellers despite receiving a product or service. These are some simple pieces of advice to protect businesses from Chargeback Fraud:

Using Customer Authentication

To reduce fraudulent cases, you should always require a CVV code when a consumer pays with a credit card and use AVS (Address Verification Service).

Implementing a 3D-Secure verification also can help prevent fraudsters from stating unauthorized online orders and escalating them to the issuing bank as a chargeback. These actions will also decrease fraudulent activity on the website.

Implementing Anti-Fraud System

Businesses should use an anti-fraud system that automatically analyzes and identifies potential fraudsters. Such a system may even block a transaction in case of suspicious activities or fraudulent buyers’ actions on other websites.

Maintaining Transparency with Customers

Ensure your descriptor is easily recognizable in the customer’s bank statements. Customer support service should be reachable. Your website should clearly state Terms & Conditions and Refund policies.

Representing Chargeback

If you are sure that the client is trying to take funds back for a service or product used, you may challenge a chargeback by providing compelling documents to the issuing bank.

Documentation depicting provided service may help win a chargeback and retain funds. However, please keep in mind that a chargeback fee will be applied under any circumstances.

Employing Chargeback Fraud Prevention Services

Using services that monitor chargebacks and notify merchants when they occur so merchants can respond promptly and minimize their losses.

Alerts can help prevent chargebacks by identifying and flagging potentially fraudulent transactions before they become chargebacks. By providing real-time notifications of suspicious activity, alerts may help businesses quickly detect and respond to potential fraud, which can help to minimize the risk of chargebacks.

Tracking Client Satisfaction

Ensure the client is satisfied with the provided service or received the product. For example, sending a satisfaction survey may help discover invisible issues and bugs on the website. By checking the satisfaction rate, you may find reasons for chargebacks. Such a survey also may be used as evidence in challenging a consumer’s dispute.

Conclusions

As chargeback fraud increases uncertainty and criminality in online payments, the government law doesn’t have the required resources to track such cases and penalize them. The merchants must therefore install their own protection mechanisms, and implementing the correct strategy for fighting chargeback fraud may save the company a lot of money.

Indeed, fighting chargebacks can be expensive for the merchants, especially when it comes to the arbitration process, which can cost around $500 despite winning or losing. However, using the 3D-Secure authentication and anti-fraud systems may simultaneously reduce the chargeback ratio and chargeback fraud volume.

The most effective solution remains to benefit from chargeback management services like Chargebackhit.