Chargeback Fraud: What it Is + How to Prevent It

Chargeback Fraud: What it Is + How to Prevent It

Chargebacks are often the bane of business owners existence — they’re tough to fight, expensive, and often frustrating. It’s often tough to discern between honest chargeback mistakes and actual chargeback fraud, and the burden falls on you to make the case for which transaction is which. This involves contacting both the bank and customer and providing accurate records of the transaction.

Businesses have to deal with:

  • Lost revenue
  • Recovering or forfeiting sold products
  • Eating transaction fees incurred during the fraud.

And sometimes even more than that.

And not only is it expensive to experience chargebacks, you also have to use hours of your and your employee’s time to fight them… sometimes it can feel like it isn’t even worth dealing with.

Fortunately, there are ways to combat chargebacks efficiently, and with the right systems in place you can save yourself substantial amounts of money.

But first, let’s define chargeback fraud:

Chargeback Fraud Definition

Chargeback fraud occurs when a customer files a chargeback on a transaction that is completely legitimate.

It’s important to take steps against chargebacks in general — order confirmation pages, delivery updates, being PCI compliant, having security measures such as Address Verification System (AVS) in place, etc. — and those will undoubtedly help fight fraud, but tackling chargeback fraud is a still a slightly different beast.

These aren’t cases of accidental errors or refunds (known as friendly fraud) — these are people deliberately taking advantage of your business.

Common Examples of Chargeback Fraud

When it comes to chargeback fraud, there are a few different tricks fraudsters typically employ, and these are becoming even more common with the rising popularity of eCommerce businesses.

Fraudsters typically contact their issuing banks and say one of the following:

  • The product wasn’t what they expected.
  • 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.
  • A recurring transaction was never agreed upon.
  • The product delivered was defective.

Here are a few other reasons why customers contact their banks for a chargeback:

  • They regret purchasing an item the next day.
  • They didn’t understand what they were buying.
  • They forgot they made the transaction.

So you may be thinking… how could we ever know which ones are real and which ones aren’t?

That brings us to the concept of “friendly” fraud.

Friendly Fraud vs. Chargeback Fraud

Friendly fraud is when a customer’s claim is legitimate, and while some reason codes or claims filed by customers may overlap with actual fraud, there are times when a customer has been wronged or made an honest mistake.

This gray area is exactly how fraudsters succeed, though, which is why you need to have systems (e.g. clear return/refund policies) in place to both preventing these before they happen AND processes for how to handle claims once they happen. Banks tend to side and take action on behalf of their customers, not businesses.

As with most strategies in business, being proactive will save you in the long run.

Ways to Prevent Chargeback Fraud

Okay. So what can you do about it?

While you can’t stop fraudsters from committing criminal activity, you can make it easier for you to prove that a chargeback is fraudulent and reduce overall chargebacks by implementing systems that facilitate clear and transparent transactions, reducing the chance of someone forgetting or making a mistake.

Here are a few processes your business needs to have to help reduce both friendly fraud and chargeback fraud:

Step #1 – Make sure your system delivers easily recognizable transactions

If your transactions appear on bank statements as 3948502TRZ – $998.67, you are going to have way more people not realizing they did business with you.

Make sure your payment gateway delivers a clean, clear code. E.g.

STEADFASTCOFFEE – $6.45

This purchase is instantly recognizable.

By structuring your payment codes in this fashion, you’ll reduce friendly fraud by reminding customers when and what they purchased.

Your POS and/or payment processor will have an area in the settings for you to adjust this if needed. Contact your current provider for more information on adjusting the product code.

Step #2 – Have effective transaction verification systems in place

This includes Address Verification Systems, credit card codes (CVV), security questions, etc.

These tools are typically associated with a PCI-compliant checkout process – particularly in eCommerce cases.

Address Verification System checks the house and zip code numbers on the transaction against what banks have to reduce fraud. Many companies conducting business online also require customers to sign back in again or verify their account before starting their session/making a purchase.

You should also deliver instant order confirmation emails. This way the customer can be reminded of what they purchased, when it should be delivered, and/or how to access their new product.

Most online gateways or POS systems will come with some of these systems already prepared for you, but they may require some tweaking to be more friendly. Whether it’s changing the design to more prominently display pertinent information such as transaction amount and expected delivery dates or being more restrictive on the credit card formatting rules, observe the most common exploitations or mistakes made by customers and adjust accordingly.

Step #3 – Have automatic flags for unusual transaction amounts

Set limits on number of items and transaction values depending on your typical purchase order. If your top buyers only purchase $50 per checkout usually, set an alert for transactions above $500 and require a signature/additional verification before allowing them to finish their order.

And if one of these purchases is flagged, have an automatic email using Zapier or your POS fire — that way someone with your team can call immediately to hash out any specifics / ensure the order is legitimate.

Step #4 – Monitor credit card notification codes

All chargebacks come with a specific code attached.

Read more: Credit Card Declined Reason Codes Explained

Take a look at all of your chargeback codes and the transactions you think are fraudulent, and then see if there’s something that could have prevented that charge from happening without affecting the checkout experience for your customers.

Step #5 – Make sure you support EMV.

Part of preventing chargeback fraud is fighting cases, and you will almost certainly lose without having your payment systems up-to-date. Chips are the new norm, and if you aren’t EMV-integrated, you will almost certainly lose the case — even if it’s completely fraudulent.

Upgrading to EMV used to be a pain, requiring a lot of downtime and upfront expenses, potentially changing your POS, and more, but some companies can now create custom POS integrations that drastically reduce the pain and labor involved with an EMV integration. They typically happen on a low-activity hour over the night and can be remarkably seamless.

If you haven’t upgraded to support chips yet, that should be your first step.

Learn more about our EMV integrations

Step #6 – Work with a Merchant Service Provider that helps you.

At the end of the day, even with all the systems in place, it can be difficult keeping up with the flow of chargebacks and documentation collection. Some merchant service providers dedicate a team member to your business to help mitigate these damages, and they can be a powerful asset for your business.

How to Fight a Case

If you’re certain a transaction is fraudulent, then it’s time to contact the issuing bank that approved the chargeback and present your evidence.

Each card network has their own submission process, so if you google the relevant bank and “chargeback dispute form”, you should find what you need.

Then, collect all the data you have on the transaction, from order confirmation page, delivery updates, chargeback codes, verification system data, etc. & contact the bank there.

The more organized and complete your data, the better chance you’ll have of fighting against the case. We recommend doing this on a recurring (weekly or every other week) basis to keep up with chargebacks.

The best way to figure out what banks like is to just start initiating these conversations. You’ll notice their typical workflow and adjust your process accordingly.

Make sure you track your progress on each case from beginning to end to learn how to win and how often you win. If you have a really high failure rate, your time may be better spent hiring someone else or letting them go.

Start Fighting Now

Every year your business grows you’ll have more and more chargebacks and chargeback fraud to deal with; it’s a natural part of running a modern business. But, don’t let that discourage you from taking steps against chargeback fraud. By taking a long look at your existing processes and seeing how you can make your data collection and transaction as secure and efficient as possible, you can set yourself up for a future of success.

At Tidal Commerce, we have a dedicated chargeback team devoted to helping you fight and save money on chargebacks. We help gather the necessary documentation for you and get you back to what you do best: running your business.

Check out how we do what we do.

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