Chargeback fraud doesn’t have to be a cost of doing business. Acknowledge the threat, and develop a process to defend yourself.

To offer a good shopping experience and earn customer trust, merchants strive to make returns fast and simple. While the possibility of returning an item easily can sway a shopper who is hesitant about a purchase, it can also draw fraudsters. In fact, there has been a significant rise in chargeback fraud during COVID-19, and it’s high time to stop seeing friendly fraud as a cost of doing business. You can take action now and build a strong prevention program by leveraging 3D Secure (3DS) and other tech tools.

How friendly or first-party fraud is different than other schemes

Friendly fraud is a type of fraud where a person reports a transaction as something they didn’t authorize or they claim that the merchant didn’t fulfill their part of the contract.

Being able to dispute charges protects customers from ill-intentioned merchants, but it’s also something fraudsters can use to target legitimate sellers.

Friendly fraud is different from other types of fraud because a wide range of schemes falls into this category. You can find fraudsters who work alone and purchase goods or services before disputing the charge to get a free item. You can also find organized networks that commit widespread fraud with the intent to resell the items they skim.

Many businesses consider friendly fraud as a cost of doing business because they can’t tell it apart from legitimate complaints.

Top challenges online merchants face

Traditionally, in-store returns don’t exceed 10% of all purchases, but return rates can be as high as 40% online. When dealing with high levels of complaints and returns, chargeback fraud can be hard to detect.

High levels of fraud

The recent uptick in fraud linked to COVID-19 is making this situation even more challenging. There has been an increase in all types of fraud in 2020, resulting in overwhelmed fraud prevention teams.

Plus, many sellers have extended their return windows to accommodate for the pandemic. This leaves criminals with more room to operate when implementing chargeback schemes.

Lack of visibility

Unfortunately, not enough businesses recognize chargeback fraud for the threat it is. It’s easy to underestimate how much you have been losing to these schemes since they often look like real complaints from customers. Besides, maintaining a good customer experience is a priority. So, tightening your return, exchange and refund policies could result in a poor experience.

However, you must acknowledge the true impact of chargeback fraud. In 2018, merchants lost $40 billion to these schemes, and experts estimate that there has been a growth of 20% for friendly fraud over the past two years.

Fraud is hard to detect

Traditional fraud risk scoring works for other schemes, but it rarely detects chargeback fraud. In an effort to remain productive and reduce losses, organizations often issue refunds without investigating the customer’s claims any further, leaving them unaware that they’ve been targeted by a scammer.

How to create a layered defense against chargeback and friendly fraud

There are solutions you can implement to protect yourself from fraudsters without sacrificing good customer service. We recommend an integrated platform with several layers of defense, including 3DS as a shield against chargeback fraud.

Integrate data into your fraud prevention program

Start by tackling data silos. Siloing your data reduces visibility and makes it harder to track whether you sent an item when a customer claims they never received it.

You can get more from your data with analytics. With the right data mining tools and customized algorithms, you can spot schemes that would be hard to detect with traditional methods.

External data can be valuable too. uses a Collective Intelligence Network that gives you access to anonymized data from other merchants. If a criminal targeted a business in our consortium data, you’ll know who they are.

You can also protect yourself from organized schemes with Linked Entity Analysis. It can spot connections between entities – for instance, several accounts using the same shipping address or the same credit card number – across millions of transactions for early detection and minimal impact.

Make chargeback fraud a priority

Chargeback fraud doesn’t have to be a cost of doing business. Acknowledge the threat, and develop a process to defend yourself.

Besides rolling out new tools and updating your return policies, you can track how this fraud evolves over time. You could use data to anticipate when levels of fraud are likely to go up – for instance, after the holiday shopping season when your customer service team deals with higher levels of returns and refunds.

Get to know your customers

Tracking your customers’ habits and predicting outcomes can help you spot malicious agents. You can use external data to spot which customers have a history of returning products or asking for refunds.

3D Secure

A 3D Secure solution requires customers to complete an additional step to verify their identity when they make a purchase. They’ll be redirected to their bank or credit card issuer’s website and be prompted to log in.

This system allows merchants and financial institutions to share more contextual data to verify customer identities. It also shifts the chargeback liability to the financial institution since they’re responsible for verifying the customer’s identity.

With 3DS, you can expect online authorizations to increase by 2-10% and false declines to become less frequent, resulting in fewer manual reviews for your team.

How can help with chargeback fraud has the right experience and expertise to help you fight chargeback fraud. Here’s how:

  • Our partnership with PAAY allows us to offer an end-to-end solution with 3DS to mitigate fraud costs and meet PSD2/SCA compliance requirements for those doing business in Europe.
  • We offer a Linked Entity Analysis tool to uncover entities that share data points and unmask organized schemes.
  • With our consortium data, you can leverage information from other merchants to immediately stop known criminals.

Contact us for a demo to see our tools in action and learn more about creating a multi-layered fraud protection program.