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
Merchant chargeback prevention services
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 can chargeback fraud be prevented? ›
Merchant chargeback prevention services
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.
What is the most common chargeback type? ›
Chargebacks from Friendly Fraud
These are by far the most common categories of chargebacks.
What is the most common method of chargebacks? ›
While banks will sometimes file chargebacks for things like authorization or processing errors, most chargebacks occur when a cardholder contacts their bank to dispute a charge on their account. Usually, they do this because they don't recognize the charge and believe it to be fraudulent.
How do you defend fraud chargeback? ›
Defending fraud chargebacks is difficult, and generally it is more effective to focus on preventing them. If you do receive a fraud chargeback and want to defend it, you need to provide documentation that shows the cardholder authorized or participated in the transaction. See Defense requirements for details.
How to identify chargeback fraud? ›
In a fraudulent transaction, the cardholder contacts their bank and provides a misleading or exaggerated reason for requesting a chargeback – such as that an item was never received or the transaction was not authorized. The bank contacts the merchant's bank to initiate the process.
Who decides who wins a chargeback? ›
The issuing bank will assign a reason code and file the chargeback. If the merchant decides to represent, they will need to compile documents and submit a rebuttal. The issuer will make a decision, although a second chargeback is also possible.
What evidence do I need for a chargeback? ›
Billing address – address that you see in the customer's profile. Customer signature (if available) – any document showing the customer's signature. Customer communication – any digital communication with the customer that is relevant to the case. Receipt – bill or invoice.
What is the burden of proof for chargebacks? ›
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.
How do banks investigate chargebacks? ›
Bank investigators will usually start with the transaction data and look for likely indicators of fraud. Time stamps, location data, IP addresses, and other elements can be used to prove whether or not the cardholder was involved in the transaction.
When a cardholder disputes a transaction, the bank initiates a chargeback and contacts the merchant providing a reason code for the dispute. The merchant then has the option to either accept the dispute and the associated losses or fight the chargeback by providing evidence that the transaction was valid.
What is chargeback fraud prevention? ›
A credit card chargeback is a process in which a card owner can reclaim money directly from the issuer after disputing a purchase charge; every ecommerce merchant has experienced the challenges that come with it. While this process is in place to protect consumers against fraud, it can also be abused by bad actors.
What is an example of chargeback fraud? ›
Common examples of chargeback fraud
The item they bought was never delivered. Someone used their credit card without their permission. The transaction made was never made by them. A subscription or recurring transaction wasn't canceled on time.
Who pays for chargeback fraud? ›
Once the customer is refunded, the bank works to retrieve the money from the business. The bank contacts the business. The business must pay a chargeback fee in addition to the chargeback amount, ranging from $20 to $100.
How to get chargeback protection? ›
To be eligible for Chargeback Protection, a merchant must have a PayPal business account and have enabled Advanced Credit and Debit Card checkout. How can a merchant apply for Chargeback Protection? Merchants can apply for Chargeback Protection from within their PayPal account.
How do you resolve chargeback issues? ›
Take initiative and communicate with the customer. Call the customer to find out what exactly happened and why they are unhappy. Once a chargeback has been filed it's too late to prevent it by issuing a refund, but you may be able to gain some insight to prevent future issues.
