Learn about chargeback fraud and how to protect against it.
Credit card fraud and synthetic identity fraud are on the rise, especially in the world of eCommerce. What that essentially translates to for merchants is a lot of chargebacks.
According to Mercator Advisory Group, there will be an estimated 33 million disputed transactions in 2022. For the most part, it’s the merchant who ends up paying for those disputed transactions, so that’s a lot of potential money lost in the coming year.
Chargeback fraud is basically when these disputes are made fraudulently with the intent of getting money back on a purchase that was made legitimately while retaining the product or service.
Before we talk too much about chargeback fraud and how to prevent it, let’s take a deeper look at what a chargeback is in the first place.
What Is a Chargeback?
Chargeback is something that occurs after “card not present” fraud, meaning primarily online purchases made with stolen credit card information.
In these situations, the victim will almost definitely have their money returned to them. They’ll contact the card issuer, whether that’s a bank or a credit card company, and dispute the charges as unauthorized. From there, the card issuer will return the money to the victim while initiating a chargeback against the merchant.
Unless the merchant is able to prove that the transaction was legitimate, they’ll most likely have to reimburse the card issuer for the funds.
If the fraudster is apprehended, which is admittedly rare, they may be forced to pay the merchant back. Essentially, the merchant is the ultimate loser when it comes to “card not present” fraud.
A 2016 study by LexisNexis found that the average actual cost to merchants from a chargeback was $2.40 for every $1 lost. That’s because the merchant isn’t just losing out on the money, but they’re losing out on the product as well. On top of that, there are banking fines and penalties, as well as administrative costs, to be considered.
Chargebacks and Friendly Fraud
You might be reading that description of how chargebacks work and thinking that it seems like it would be relatively easy to fake. Well, you’re right. Not only is it an easily falsified process, but it’s also a commonly used method of fraud.
Chargeback fraud is when a person willfully makes a purchase from a merchant, and then reports the transaction as fraudulent to their card issuer. From there, the chargeback process pays out and the fraudster gets to keep their purchase while being refunded the cost.
Banks and card issuers do have processes in place to try and determine if a transaction dispute is legitimate. They’ll have on-staff investigators examine the details of the transaction and match it against the customer’s purchasing history. However, in most cases, these investigations will err on the side of the customer because the threat of getting it wrong means lost business for the institution.
Friendly fraud is similar to chargeback fraud, but it’s not done with malicious intent. It could be a child getting a hold of their parents’ card information and using it to make purchases via video games or the internet without being aware of the consequences. It could also be the result of receiving an unsatisfactory product that wasn’t what the customer expected, or a completely forgotten about transaction by the customer.
In all of these situations, the result is generally the same. The merchant is on the hook and will probably take a loss.
How to Protect Against Chargeback Fraud
After the chargeback is issued, the only real option left to the merchant for recovering lost revenue is to fill out a dispute response document that challenges the chargeback.
From there, the onus is on the merchant to prove that the transaction dispute was illegitimate.
The best method to prevent chargeback fraud is to stop it before the transaction goes through. Here are some defensive tactics that can help mitigate the success rate of chargeback frauds and chargebacks in general:
- Use multi-factor authentication for card purchases
- Confirm orders with differing billing and shipping addresses
- Use in-depth identity verification techniques for customers presenting red flags
- Make sure it’s as easy as possible to ask for a refund to prevent chargebacks from being made out of convenience
- Provide 24/7 customer service
Chargeback Protection with Fraud.net
Fraud.net’s chargeback protection can provide a comprehensive defense against chargeback fraud that will help keep fraudsters out of your pocketbook.
Our advanced machine learning and anomaly detection capabilities will provide continuous monitoring and advanced analytics while extending good controls.
Stopping fraud in its tracks so businesses like yours can operate worry-free is our ultimate mission. If you or your company are looking for the ultimate fraud defense platform, sign up for a free demo today.