Identity Verification
Chargeback Fraud: Types, Challenges, and 4 Prevention Tips
Understand chargeback fraud, how it can affect your business, and tips for preventing the cost and damage of criminal or illegitimate chargebacks.
October 30, 2023
min read

What Is Chargeback Fraud? 

A chargeback is the cancellation of a payment transaction by the card issuer or payment processor, usually when the customer disputes a charge.

Chargeback fraud is when a customer intentionally challenges a legitimate transaction through a payment processor or card-issuing bank, resulting in a chargeback. When an individual commits chargeback fraud, the main objective is to keep the item and receive a refund. Fraudsters often provide various excuses to dispute legitimate transactions.

Customers intentionally initiate chargebacks through the bank or processor instead of contacting the company from which they made the purchase. This technique amounts to theft through the refund process.

This article is part of our series on identity fraud.

In this article:

What Are the Types of Fraud that Can Result in Chargebacks? 

Preventing chargeback scams can be challenging, given the difficulty of identifying the fraud that caused the chargebacks.

Companies can mitigate risks, improve business operations, and increase revenue by identifying and classifying the types of fraud that result in chargebacks.

There are three types of scams causing chargebacks:

Criminal Fraud

Criminal fraud is when an individual uses a stolen credit card number to illegally purchase a product or service. Companies looking to prevent chargebacks before authorization aim to minimize criminal fraud.

Friendly Fraud

Friendly fraud is when a customer purchases an item or service using a debit or credit card and later disputes the charge without offering the bank a good reason. It is the standard type of chargeback fraud. 

Cardholders can make a legitimate dispute if they are victims of actual fraud or if the goods or services they paid for are unavailable and the seller is unresponsive or unhelpful.

Almost all transaction cardholder issues are easier and faster to resolve by contacting the seller directly. Cardholders must try resolving the issue with the merchant before requesting a chargeback.

Legitimate Disputes

Some chargebacks result from legitimate disputes (ideally, all should). These are not considered fraud. A legitimate dispute arises when a customer faces a problem from the merchant.

Sometimes, the company might misplace an order or have an error in the processing or delivery of the order. A poor customer experience can result in a legitimate dispute and a chargeback.



The Challenges of Fighting Chargeback Frauds 

The bank may assign a pre-defined code to a dispute based on the customer's justification for the chargeback. Too often, sellers assume that the reasons given are legitimate without investigating the truth. In some cases, companies have limited resources and don't want to deal with the process of contesting a chargeback. Sometimes, the buyer or fraudster's insistent claims can deter the merchant from pursuing the issue.

Unfortunately, accepting unverified chargebacks makes sellers vulnerable to this type of fraud. Since fraudulent chargebacks often come from a frequent or trusted customer, the seller doesn't suspect that the customer is lying.

Another reason for the rise of false chargebacks is that the regulations governing chargebacks are often outdated, long predating the Internet age. As a result, these regulations are ineffective in today's online market. Prosecutors may also lack the resources or political will to solve fraud-related crimes.

Fighting chargeback fraud is difficult, so it's essential to prevent fraud before it happens.

What Are the Costs Related to Chargeback Fraud? 

Whether legal or fraudulent, chargebacks affect business interests and inevitably increase the chargeback rate, the percentage of sales that result in the customer requesting a chargeback. In addition, chargeback fraud results in various direct and indirect costs, including:

  • Fees—all chargebacks involve fees. Chargeback fees are usually between $10 and $20 for one claim. These costs can add up to the payment card processing fees.
  • Monitoring program fees—credit card programs like Visa and Mastercard monitor chargeback rates. If the rate exceeds a certain threshold (0.65% for Visa and 1% for Mastercard), the credit card company can put the merchant in a monitoring program. Participation in the program may result in monthly fees and fines until the chargeback rate falls below the threshold.
  • Lost goods—the eCommerce operator must provide a refund for the chargeback, but the customer is not obligated to return the purchased product if the bank approves the chargeback request.
  • Operating costs—order processing involves resource and operating costs, including production, packaging, transportation, and logistics costs. In the case of chargeback fraud, the merchant does not recover any of these costs. In addition to wasting resources, time, and money to ship the order, the chargeback disputation process is also time-consuming and involves costs. It usually involves hiring a dedicated fraud analyst and joining a fraud monitoring program.
  • Lost opportunities—all refunded orders had the potential to be successful orders if placed by a different customer. As a result, chargebacks result in the indirect cost of lost revenue opportunities. Over time, these costs can add up and hamper the company's growth.

4 Tips for Preventing Chargeback Fraud 

Here are some tips to help companies protect themselves against fraudulent chargebacks:

Using Anti-Fraud Technologies

Visa and Mastercard have created authentication techniques to enhance the security of the card acquisition process and protect businesses from chargeback liabilities. These authentication protocols shift the chargeback responsibility to the card issuer rather than the merchant.

Anti-fraud technology also identifies high-risk transactions, allowing companies to block opportunities for chargeback fraud by creating custom rules for accepted and disallowed transactions. In addition, it helps identify and stop fraud attempts from blocked countries or specific IP addresses. Having a continuously operating fraud prevention solution helps significantly reduce the overall risk of fraudulent disputes.

Keeping Proper Transaction Documentation

Having accurate records of all payment card transactions is essential for evidence when contesting a chargeback claim. The best records to have are physical records like receipts and signatures. 

However, as the volume of eCommerce transactions increases, it is not always possible to store all the physical documents. In such cases, a technology solution can keep transaction records, including details like each transaction's IP addresses, dates, and times.

Maintaining Payment Description and Company Name Consistency

When customers don't recognize a charge on their credit card bill, they often initiate a dispute. Therefore, it is crucial to have a clear, consistent description of the product purchased and the merchant's name so the customers can recognize the transaction. 

Companies can easily prevent customers from panicking by ensuring the charge displays the company's name (the same name the customer knows). This approach helps avoid false chargebacks and the associated costs.

Training Employees on the Payment Processor's Guidelines

If employees understand the compliance protocols issued by the payment processor, they can detect suspicious activity when it occurs. In addition, training staff on cardless and card-based transactions can help prevent fraud before it happens—this is the best line of defense for a business. 

Any eCommerce business should implement a secure payment process and train employees regularly to comply with the security guidelines and identify fraud risks.

Fraud Prevention with BlueCheck

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