Top Tips to Prevent Chargeback Scams & Stop Dispute Abuse
Right up front, let’s clarify that chargebacks are an important consumer safety mechanism. The ability to dispute unfair charges or practices is a cornerstone of the entire credit card system.
That only applies, however, when the system is used as intended.
The process was designed to protect consumers. But, we’re seeing a growing number of cases of cardholder chargeback misuse. And, these cases are causing higher costs and more work for everyone involved.
In this post, we’ll look at how and why these con games exist, and provide a few tips for avoiding them altogether.
Recommended reading
- Verifi CDRN: Cardholder Dispute Resolution Network
- What are Chargeback Alerts? The Merchant's Guide for 2024
- The Top 30 Chargeback Risk Factors to Eliminate in 2024
- Examining AI’s Historic Role in Fighting ‘Friendly Fraud’
- What is a Business Continuity Plan? Tips, Guides & Examples
- Can a Chargeback Blacklist Prevent Post-Transaction Fraud?
Chargeback Scams vs. Friendly Fraud
First, let’s clarify what we’re talking about here.
Not every instance of first-party chargeback misuse is a scam. More times than not, misapplication of the chargeback system happens out of ignorance. In other words, the cardholder isn’t fully aware of any wrongdoing. That’s why such cases are labeled friendly fraud.
A customer might not recognize your company’s billing descriptor on their statement, for example. Or, a kid might make a purchase without telling their parent. In either of these examples, the cardholder suspects fraud and calls their bank to dispute an unrecognized charge. They’re going about it the wrong way, but it’s an honest mistake.
Chargeback scams are different. They’re usually described as deliberate, premeditated acts of fraud committed through the chargeback system. Think of it as “cyber shoplifting;” a person buys something, fully intending on filing an unjustified dispute to try and keep the product or service and still get their money back.
Chargeback Scam
A deliberate act of exploiting the chargeback system to obtain goods or services for free.
Friendly Fraud
A customer chargeback triggered by misunderstandings, forgetfulness, or other errors.
Unfortunately for you, though, the end result is the same in both cases. The only difference is the motivation.
5 Most Common Chargeback Scams
Technology has made it easier than ever for consumers to buy from you, but it’s also upped the number of ways they can take advantage of you. On that note, here are a few common chargeback scams to keep an eye out for:
THE SCAM: The buyer makes a purchase and receives the item ordered. They then call the bank to claim it never arrived.
HOW IT’S DONE: This can work in a few ways. One common tactic is for a cardholder to make the purchase, but use a shipping address that’s wrong or doesn’t exist.
The carrier can’t deliver the order and marks it as undeliverable. However, before returning the item to you, the shipper may call the “customer.” The scammer provides their correct address at that point. The package is successfully delivered… but that doesn’t stop the cardholder from calling the bank and claiming the order was sent to the wrong address.
In another variation, the scammer has a purchase shipped to a neighbor’s house, watches for the order to arrive, then retrieves it and files a dispute.
THE SCAM: The buyer falsely claims that the merchandise was not as described or that the wrong item was sent.
HOW IT’S DONE: A cardholder purchases an item, then calls the bank and claims the order is either completely wrong or doesn’t match the description given
With eCommerce, it’s difficult to prove you shipped the correct item and that it matched the customer’s expectations. If the order really was wrong, of course, a legitimate customer should’ve called you before contacting the bank. If that doesn’t happen, the bank may allow the dispute; especially with hard-to-prove claims, it makes sense for them to side with their customer.
Fraudsters know this, though, and use it to their advantage. It’s their word against yours, and sadly, it’s on you to provide evidence that proves the transaction was valid.
THE SCAM: The buyer engages in “cyber shoplifting” by purchasing an item with the intent to file a chargeback later.
HOW IT’S DONE: Sometimes, buyers know exactly what they’re doing and use the chargeback process to try and get something for free. The motivation is no different from credit card fraud. In either case, you have someone who knows the system and how to use it against you.
But, cyber shoplifting can be harder to identify up front. The scam is in place at the time of the transaction, but the dispute won’t happen until well after the purchase. In other words, the scammer knows it’s going to happen, but you’ll typically have no reason to doubt the transaction until much later. Even if the scam is detected, the crook can usually play off the incident as a simple misunderstanding.
THE SCAM: A buyer requests a refund, then files a chargeback before the refund can be finalized. The result? A double refund.
HOW IT’S DONE: A fraudster tracks a product they had returned to you. Just before you actually receive the return, though, they file a chargeback, claiming the return was not processed. Because you’re unaware of this (there’s a reason they wait until the last minute to dispute), you actually process the refund normally. It doesn’t always work, but the scammer may end up with both a return refund and a chargeback refund.
Another way this works is that the cardholder contacts the bank first and initiates a dispute. They then call you and request a refund. You want to avoid a chargeback, so you issue the refund… not realizing they already filed one.
THE SCAM: Claiming a subscription was canceled, despite the customer not having gone through the official process to end it.
HOW IT’S DONE: Your customer claims you billed their credit card after they canceled the service, leveraging the chargeback process as a way to end a service agreement and potentially get refunded for some (or all) of the subscription price.
In a typical example, a fraudster uses an online service for several months, then contacts the bank and files a chargeback for the full amount paid, saying the service should have been canceled. Recurring billing scams for physical items work similarly. The cardholder waits for the shipment to arrive, then claims the subscription has been canceled. The scammer gets the merchandise and a refund while you simply get burned.
While it may seem unfair, it’s usually best to presume good faith on the part of the buyer. That can be tough, though, especially when you’re sure they’re playing you… but you can’t prove it.
How to Prevent Chargeback Scams
Can chargeback scams be prevented? In many cases, yes, but there’s no single “one-size-fits-all” method to protect yourself.
That said, you can implement several basic best practices to keep from being a victim. Conveniently, these same moves can help protect you from other forms of chargeback misuse, too.
Preventing scams is always going to provide the best outcome. But considering that some of the people behind chargeback scams are dedicated fraudsters, prevention may not always be possible.
Luckily, you also have the option of responding to all chargeback requests, and engaging all chargeback fraud through the representment process.
How to Fight Chargeback Scams
In both the short- and long-term, representment can be your most effective weapon against friendly fraud and chargeback scams. Challenging chargebacks may not always seem worth it, especially for low-value items. If you don’t fight back, however, it’s easy for banks to assume that you must really be responsible.
It may seem counterintuitive, but the best way to improve your reputation with issuing banks is by disputing all friendly fraud chargebacks. To do that, you need to:
It’s true that chargebacks are an unavoidable part of the eCommerce landscape. There’s no way to ensure that you will never fall victim to the occasional chargeback scam.
That said, a proactive approach can help you maintain a healthy business bottom line and a positive relationship with your customers. Contact Chargebacks911® and get started today.
FAQs
How do I stop being chargeback scammed?
You can stop chargeback scams by implementing robust fraud detection tools, maintaining meticulous transaction records, and fostering open communication with customers to address concerns before they escalate.
Is a chargeback theft?
No, chargebacks are a protected consumer right designed to defend cardholders from unscrupulous merchants or retail practices. That said, chargebacks can be abused by cardholders and used to facilitate first-party fraud attacks.
Can a bank reverse a chargeback?
Yes. Merchants can dispute customer claims through a process called representment. A sufficient amount of compelling evidence supporting the validity of the original transaction may move the bank to reverse the chargeback.
Are chargeback fraud and friendly fraud the same thing?
More like cousins, actually. Chargeback fraud is a deliberate act where a customer falsely claims a transaction was unauthorized, intending to retain both the product and the refunded money. Friendly fraud, on the other hand, occurs when genuine customers mistakenly initiate chargebacks due to misunderstandings or forgetfulness without malicious intent.
What happens if you lie about a chargeback?
When cardholders are caught lying about a chargeback, they may lose the dispute, resulting in the original charge being reapplied to their account. Furthermore, they risk damaging their relationship with their bank or credit card company. They might even face account termination or legal consequences in severe or repeated cases.
