Chargeback fraud occurs when a customer disputes a transaction on their bank card. They claim not to have received the goods or services they paid for, so they start the chargeback process to try and reclaim the money. But is it true or a fraud attempt?
It’s crucial that businesses know what a fraudulent chargeback involves. We can then look at how to reduce the risk of being affected by this fraud and how to dispute chargebacks safely.
What is chargeback fraud, and why does it happen
Legitimate chargebacks happen when a customer disputes a payment they’ve made. It can happen for many reasons, and many chargebacks are genuine. Merchants and banks need to manage genuine chargebacks to ensure they’re dealt with correctly without inconveniencing the customer.
However, fraudulent transactions can also take place. With chargeback fraud, the customer claims they never received what they paid for. Known as “friendly fraud,” this is when the transaction is correct, but the customer decides to commit fraud by falsely claiming that it isn’t.
Different types of chargeback
It’s important to see the difference between chargeback requests made by mistake and those with malicious intent by a customer. This helps the issuing bank to resolve disputes with their cardholders and avoid negative customer experiences while lowering chargeback fraud losses.
Chargeback fraud may happen when the product or service is correctly delivered to a customer. Then, the customer decides to tell their credit card company that it didn’t arrive, hoping to get it for free. The chargeback transaction might also relate to a stolen card. Rather than chargeback fraud, some cases might be a case of the customer making a genuine mistake.
Common types of chargeback fraud
Possible cases of fraudulent chargeback can be divided into several categories to help understand them. The following are the most important categories to be aware of.
Criminal fraud
In this case, the credit card has been stolen, or the details of the customer’s account have been hacked. It may lead to a fraud case when criminals pay for goods with a hacked or stolen credit card. Merchants can look out for this kind of fraudulent activity by spotting unusual activity or suspicious shipping addresses that don’t match the customer’s profile.
An Address Verification Service (AVS) check can help ensure the product or service goes to a verifiable address as part of the merchant’s action to prevent this type of fraud. Fraud detection tools can also be used to verify the customer’s identity and spot suspicious activity or fraudulent purchases.
Friendly fraud
It is a situation where the product or service has been ordered by a legitimate customer and correctly delivered to them. They then claim that this purchase wasn’t completed to their satisfaction. They may claim that the order was never delivered to them or that it was incorrect.
It may be a misunderstanding of a legitimate purchase rather than chargeback fraud. Maybe the customer carried out online transactions they forgot about until reading their credit card statement.
Or perhaps it’s due to a misunderstanding of the merchant’s return policies. They may believe that contacting their bank or the merchant’s bank is the right move when the issue could be resolved directly with good customer service.
Some strategies merchants and banks use can help to reduce the number of chargeback issues of this type. Transparent billing descriptions, delivery confirmation, and clear customer communication are among the best ways to lower the risk. The right approach also protects the merchant in the case of malicious friendly fraud attempts.
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Merchant error
In this chargeback situation, the customer receives the order, but there have been some issues, such as late delivery or incorrect billing. The card issuer then receives a chargeback request incorrectly.
Accurate and timely order fulfillment helps to lower the risk of this sort of chargeback. Prompt communication can also prevent chargebacks that are caused by confusion or error.
The order and billing process can be streamlined through automation. Making invoices simpler to read and using payment reminders are other tips to help you avoid chargeback issues. Chargeback protection is an optional type of insurance that reduces the risk of the merchant being left with losses.
How the chargeback process works
The chargeback lifecycle begins when the customer initiates a dispute by contacting their bank. There is a time limit on when they can initiate it, as stated in the account or card’s terms.
The customer’s bank or credit card company then forwards the chargeback details to the merchant’s bank or their payment processors. They will then advise the merchant, who has the chance to challenge the chargeback by providing evidence.
The funds will be temporarily blocked from the merchant’s account while they’re asked to explain the situation. The merchant’s bank (known as the acquiring bank) then sends the reply to the customer bank to complete the dispute resolution process.
The role of banking regulation in the chargeback process
Each step of the chargeback process is covered by the current banking regulations. It explains the steps to be carried out and how long is allowed in each phase. It removes any issues over questions such as who pays chargeback fees and who decides if chargeback fraud has been committed.
Merchants need to know the updated chargeback rules to avoid any problems or unnecessary costs. For example, if you delay your response too long, you might lose the chance to prove that the chargeback is fraudulent, leading to lost revenue.
Proven strategies to prevent and fight chargeback fraud
The following strategies can help avoid chargeback fraud on credit card transactions.
Use secure payment gateways. PCI DSS-compliant solutions use standard security measures to protect the card data at all time
Robust verification measures such as AVS and CVV checks help spot possible fraudulent transactions early. These checks confirm if the transaction is suspicious for reasons such as not matching the customer’s identity or address.
Clear refund and return policies on legitimate purchase issues. Transparency helps prevent friendly fraud by providing useful solutions such as simple refund requests.
Keeping the right documentation is vital. Receipts, tracking numbers, and communication logs can all be used to provide evidence and avoid the financial hit of lost revenue.
Monitor transactions in real time using fraud detection tools or services. These options monitor the credit card transaction data for possible warning signs.
But what can a cardholder do to avoid getting their card details stolen and used to commit chargeback fraud? For one, issuing a card with a reliable financial institution is a must.
Genome is an electronic money institution licensed and supervised by the Bank of Lithuania. We provide many services for individuals and businesses, including virtual and physical Visa debit cards.
Our virtual cards exist entirely online, so there’s no chance they can be stolen in real life. As for our physical cards, you can request that the cardholder details are not printed on your plastic card during the order process, which significantly lowers the chances of fraudsters using it if it gets lost or stolen. Moreover, our cards can be blocked instantly if you lose them – all it takes is one tap on the Genome app or a click on our web version. Also, all our client log-ins and confirmation operations are protected by two-factor authentication.
Our other features include multi-currency accounts, SEPA Instant Transfers, and dedicated IBANs. Our business wallet users can also access international payments with good currency exchange rates and batch transfers.
Check out Genome’s security-dedicated page to learn more about different fraud types and stay informed.
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All in all, fraud prevention tips like fraud detection tools, using multi-factor authentication, and ensuring PCI DSS compliance can lead to a lower risk of fraud and reduce the merchant’s expense in terms of chargeback losses.
Best practices for handling disputed transactions
Handling the disputed transaction process calmly and professionally can lower your chargeback rates by reaching the right resolution as fast as possible. Consider the evidence you have as well as your relationship with the customer.
If it’s a valued, long-standing customer, this makes chargeback fraud on their part less likely. It means you might look for proof that it’s simply an error somewhere in the process.
Any inquiries from banks and card networks should be dealt with on time. Giving a full reply as soon as possible increases the chance of reaching a positive resolution.
You can keep everything under control by keeping a dispute management calendar and designating a team or person to manage chargebacks. Such a team can deal with all the chargeback cases and expertly identify the different situations that can occur.
Advanced technology and tools to reduce risk
As technology advances, more tools are available to help fight fraudulent chargeback cases. Machine learning is one of the best examples, as this technology allows the chargeback process to be automated. There’s no need to manually check every case when the system does it for you every time.
Fraud detection software continues to evolve, making it easier to spot high-risk transactions or fraudulent chargeback requests. Data analytics can be used to reduce chargebacks by understanding the highest-risk cases.
Automating part of the transaction review process to spot anomalies quickly is a good starting point. It lets you quickly analyze the card details for each disputed transaction or potential chargeback fraud.
By providing additional layers of security, these solutions make life easier for companies without affecting the customer service provided.
Avoid fraudulent chargeback issues
Fraudulent chargeback cases can impact a company’s profits. Identifying risky transactions and customer issues early on is the best way to try to avoid chargeback problems. While some chargeback cases are related to fraud, you should be aware of other situations, such as customer error or delivery issues.
Stay vigilant and update your policies to reflect changing technology and emerging risks. Proactive steps to avoid unexpected chargeback costs include looking for professional advice and starting a dedicated team that focuses on managing your chargeback cases.
FAQs
Can chargebacks be disputed multiple times?
Yes, the first and second chargeback stages each provide the opportunity to dispute the claim with the customer. If it still can’t be resolved, the chargeback request can eventually reach the credit card company for arbitration to be carried out.
What documentation is most effective for fighting friendly fraud?
Documents that give evidence of delivery to the customer are extremely useful. Fraud of this nature can be proven if the customer has signed to confirm receipt and acceptance.
Do digital goods face more chargeback fraud than physical products?
Yes, the online process makes it easier for a customer to incorrectly claim a chargeback. If the merchant doesn’t have robust processes in place, it can be more difficult for them to prove that an online transaction was completed correctly.
How often should I review my fraudulent chargeback prevention strategies?
The size of the business and the number of high-risk transactions determine how often you should review your chargeback processes and strategies. Some businesses may only need to do this quarterly, while others need more regular updates on how they manage chargebacks.
What role does customer service play in preventing chargeback fraud?
Good customer service can lower the risk of fraudulent chargeback activity. It is because the business can ensure that the product is received and that the customer is satisfied with alternatives, such as a helpful returns policy if needed.
