The Top 10 Tips for Chargeback Fraud Prevention in 2024

The Top 10 Tips for Chargeback Fraud Prevention

Imagine you own a bike store. A customer walks in and purchases an expensive model but then calls you the next day and says they want their money back.

Being a reasonable merchant, you tell the customer to bring the bike back to the store for a full refund. To your surprise, however, the buyer says no. They insist that you should provide the refund without the bike being returned. Even more shocking, the customer’s bank actually agrees and reverses the charge.

That would be difficult to avoid in a brick-and-mortar store, but it happens all the time to online merchants.

It’s called chargeback fraud. Bad actors subvert the credit card chargeback system in order to get something for nothing. It’s a fast-growing threat; according to estimates by Juniper Research, chargebacks cost merchants around $130 billion in 2023, up from $40 billion in 2018.

Obviously, that’s not great. But, we do have some good news: you don’t have to be a victim.

How Does Chargeback Fraud Work?

Chargeback fraud occurs when cardholders bypass you and go directly to the bank for a refund, knowing they’re not entitled to a chargeback. It’s a form of first-party fraud. So, ironically, a mechanism created to protect consumers is now being used by consumers to scam merchants.

There are a lot of common scenarios that can lead to chargeback fraud. For example, chargeback fraud can happen if the customer:

wants a refund, but doesn’t want to pay return shipping.
experiences “buyer’s remorse” and regrets making a purchase.
feels the return process is too slow or complicated.
assumes it’s easier to deal with the bank than request a refund.
waited too long to request a refund and the return time limit expired.

Another common case is family fraud. This happens when a family member of the cardholder makes a purchase, but the cardholder doesn’t want to pay the bill.

Many illegitimate chargebacks result from mistakes or misunderstandings. For example, a cardholder who doesn’t recognize a charge or one who thinks a chargeback and a refund are the same thing. In contrast, deliberate chargeback fraud is a premeditated practice. You can learn more about this topic below:

Learn more about friendly fraud

A 10-Step Strategy for Chargeback Fraud Prevention

The strategies you’d adopt to engage in chargeback fraud prevention are different from those you might use to fight account takeover or synthetic fraud.

For instance, one tactic that can help you fight criminal fraud is to deploy fraud filters. These tools can be helpful, but they’re designed to identify and block bogus orders before processing. Chargeback fraud, however, happens post-transaction. You won’t even know it’s fraud until after the fact.

A Real-World Look at Chargeback Management

Based on a survey of over 400 merchants, the report presents a comprehensive, cross-vertical look at the current state of chargebacks and chargeback management.

Access the FREE Report

It’s possible to tighten your fraud filter parameters, but false declines will cost you far more than you’ll save. Plus, you won’t have any measurable impact on chargeback fraud.

So, that points us to the key question: how do you prevent chargeback fraud from happening?

Chargeback fraud prevention requires a highly involved approach. It touches on customer service, data organization, and fraud mitigation technology. Below, we’ll outline ten key strategies that can help you protect your business against fraudulent chargebacks:

#01 Optimize the Customer Experience

If cardholders feel angry, frustrated, or dismissed by your service department, they may file an invalid chargeback out of spite. Providing great customer service is your first step toward chargeback fraud prevention.

How to Do It:

Train Your Staff: Equip your customer service team with the skills to handle complaints professionally and empathetically.
Streamline Communication: Ensure customers can easily reach your support team through multiple channels, such as phone, email, and live chat.
Follow-Up: After resolving issues, follow up with customers to ensure their satisfaction and show that you value their feedback.

#02 Perform “Red Flag” Reviews

Have new customers ordered high-ticket merchandise or multiples of the same product? They could be stockpiling items to resell and planning to dispute the transaction later. In these cases, you’ll want to contact the customer and confirm the transaction details prior to processing, so you have a record of the cardholder authorizing the purchase.

How to Do It:

Deploy Fraud Filters: Implement a system that flags suspicious orders based on criteria like order size, frequency, and shipping address.
Manual Review: Have a team member review flagged orders and contact the customer to verify the purchase.
Documentation: Keep records of the verification process, including communication logs and customer responses, to provide evidence if needed.

#03 Create a Blacklist

Studies show that roughly 40% of customers who successfully commit friendly fraud will try it again within 60 days. A blacklist of previous offenders can help by automatically identifying and blocking bad actors based on the list. This will, at least, prevent you from being victimized more than once.

How to Do It:

Track Fraudulent Activity: Maintain a database of customers who have previously committed fraud.
Block Bad Users: Use eCommerce software that can automatically block blacklisted customers from making future purchases.
Regular Updates: Regularly update the blacklist based on new fraud attempts and shared industry data.

#04 Confirm Orders Before the Sale

If you sell high-ticket merchandise, consider using active order confirmation. Send a confirmation email requesting an electronic signature prior to finalizing the purchase. If the customer later tries to say they received something different than what was ordered, you’ll have evidence to refute the claim.

How to Do It:

Send Confirmation Emails: After an order is placed, send an email to the customer requesting confirmation of the purchase.
Require Electronic Signatures: Implement e-signature technology to obtain a digital signature from the customer, confirming their intent to buy.
Store Confirmations: Save all order confirmations and signatures in your order management system for future reference.

#05 Confirm Orders After the Sale

Arrange for an order confirmation to be automatically emailed to the buyer once an order is placed. Customers appreciate it, and it also provides a traceable record of the order. Similar emails can be sent at other key stages of the order, providing a “paper trail” of the transaction.

How to Do It:

Automate Emails: Use your eCommerce platform to automatically send confirmation emails at each order process stage.
Detailed Information: Include detailed order information, such as item descriptions, quantities, prices, and expected delivery dates.
Track Communication: Maintain records of all confirmation emails sent to customers.

#06 Track Your Orders

Packages left on doorsteps make you vulnerable to “non-delivery” chargebacks. On the other hand, it’s hard for the buyer to claim an order never arrived if you have signed delivery confirmation showing the item reached the intended recipient.

How to Do It:

Use Reliable Shipping Services: Partner with shipping providers that offer tracking and delivery confirmation.
Require Signatures: High-value items require a signature upon delivery to ensure the package reaches the intended recipient.
Monitor Shipments: Regularly check the status of shipments and follow up on any delivery issues promptly.

#07 Send a Reminder

It’s not your fault if a customer forgets to cancel a subscription. But, you might still get blamed. To prevent a chargeback, send an email notification to gently remind the subscriber of an upcoming automatic payment before debiting any funds from the customer’s account.

How to Do It:

Schedule Notifications: Set up automated email reminders to be sent before a subscription renews or an automatic payment is debited.
Clear Communication: Clearly state the renewal date, amount, and instructions on how to cancel if the customer chooses to do so.
Track Responses: Keep records of reminder emails and customer responses or actions taken.

#08 Limit Transaction Velocity

It’s not uncommon for cyber shoplifters to complete multiple transactions in quick succession, and then request chargebacks later. You’ll want to Watch for high transaction velocity, and consider placing a limit on the number of orders a buyer can complete in a 24-hour period.

How to Do It:

Set Limits: Implement limits on the number of transactions a customer can make within a specified period, such as 24 hours.
Monitor Patterns: Use fraud detection software to identify unusual purchasing patterns and flag potential fraud.
Require Verification: High-velocity transactions require additional verification steps, such as two-factor authentication or manual review.

#09 Simplify Your Return Policy

This is probably one of the most important factors in your chargeback prevention arsenal. Complex return rules may discourage buyers from asking you for a refund, leading them to turn to the bank instead. You should make returns hassle-free and prominently display your return policy anywhere a buyer would expect to find it.

Clear Guidelines: Write a return policy that is easy to understand, outlining the steps customers need to take to return an item.
Visible Policy: Display the return policy prominently on your website, especially on product pages and during checkout.
Hassle-Free Process: Make the return process as simple as possible, including providing prepaid return labels and prompt refunds.

#10 Define Your Return Policy

Place a confirmation button or checkbox on your checkout page. Before the transaction can be processed, buyers must acknowledge that they have read and understood your terms and policies.

How to Do It:

Add Confirmation Steps: Incorporate a checkbox or button on the checkout page that customers must click to confirm they have read and agree to your return policy.
Detailed Terms: Ensure the terms and policies are clearly written and accessible from the checkout page.
Store Consent Records: Record customer consent to your terms and policies as part of the transaction history.

Of course, there’s a lot more to effective chargeback prevention than best practices. You’ll need to solve for resources, staffing, internal management, and risk assessment.

Now, you have to ask yourself a very frank and honest question: is this something you can accomplish in-house or on a budget?

Chargeback fraud … friendly fraud … whatever you call it, it wreaks the same havoc on your bottom line.

Chargeback Fraud Prevention: Can I Do it on My Own?

Chargeback fraud prevention — and chargeback management in general — is too complex for a “one-size-fits-all” solution.

Your needs can vary dramatically according to product vertical, risk level, and other factors. A strategy that works for one merchant might be a complete bust for you. To make matters worse, your in-house fraud management department has several strikes against it right from the start:

Efficiency

DIY fraud management may appear more cost-effective because it uses existing resources and eliminates fees. Unless you have dedicated career experts on your payroll, however, the inefficiency of in-house management usually delivers a far lower ROI than hiring professional providers.

Reporting

Without transparent, in-depth reporting, it’s hard to know how much your fraud management actually costs, what is or isn’t working, or how much ROI you receive. Unfortunately, just managing reporting can be a job in itself.

Agility

Fraud techniques are constantly evolving. You have to quickly and efficiently change directions and adapt your strategies to combat new fraud threats. That’s hard to manage on top of your normal, day-to-day operations, especially with a complex threat like chargeback fraud.

Experience

No one knows your business better than you. At the same time, you don’t know chargebacks as well as a chargeback specialist. Realistically, unless you’re daily immersed in the world of fraud and emerging threats, there are a lot of subtle things you’ll miss because you don’t know how to look for them.

Insight

It’s hard to determine where fraud comes from. Even merchants who pay attention to such details often misinterpret data or rely too heavily on reason codes. You can aim for chargeback fraud prevention but end up fighting the wrong source points with the wrong tactics.

ROI

Here’s the sad truth: the success rate of DIYers trying to reverse chargebacks is painfully low. In the end, it takes full-time fraud-fighting professionals to create a multi-faceted management strategy that works and keeps working.

Using the Right Tools to Prevent Chargeback Fraud

Handling chargeback management solely in-house is often impractical due to the complexities and resources required. Instead, it's more effective to use a combination of tactics and technologies, including both in-house and outsourced solutions.

There are a variety of tools at your disposal to tackle chargeback fraud. Some of the best options include:

Chargeback Alerts

Chargeback alerts are a crucial first line of defense, allowing merchants to intercept and resolve disputes before they escalate. These alerts are provided by third-party vendors who monitor chargeback activity and notify you when a potentially fraudulent chargeback is initiated. This early warning system gives you the opportunity to resolve customer disputes before they become costly chargebacks.

Learn more about chargeback alerts

Order Insight

Order Insight offers additional layers of protection by providing real-time data and transparency between merchants and cardholders. Order Insight allows you to provide both customer and the issuer with crucial data about Visa transactions, including shipping and tracking information. It lets you communicate directly in real-time, preventing disputes from escalating into chargebacks.

Learn more about Order Insight

Consumer Clarity

Similar to Order Insight, Consumer Clarity lets you provide real-time data to both cardholders and banks regarding Mastercard transactions. With this key information, you can resolve inquiries before the devolve into chargebacks. It also allows you to directly communicate with customers before disputes can turn into costly chargebacks.

Learn more about Consumer Clarity

Visa Rapid Dispute Resolution

RDR facilitates swift and automated dispute resolutions, reducing the time and resources needed to handle disputes manually. With RDR, Visa provides a rapid decision on disputes, saving merchants from the lengthy chargeback process. It's particularly useful for tackling friendly fraud, where customers may initiate a dispute instead of requesting a refund.

Learn more about RDR

Mastercom Collaboration

This tool supports seamless communication and collaboration among merchants, issuers, and acquirers to streamline the dispute process and minimize chargebacks. It enables real-time communication, efficient handling of disputes and provides insights to prevent future chargebacks. By working together, all parties can resolve disputes faster and more effectively.

Learn more about Collaboration

By leveraging these tools, merchants can significantly reduce the incidence and impact of chargeback fraud. Our data suggests that the average merchant could see up to a 90% reduction in chargeback issuances by incorporating these key tools into their arsenal.

Ready to get started?

Chargebacks911® works closely with your team to create a comprehensive strategy customized for your business. Best of all, it’s backed by the industry’s only performance-based ROI guarantee.

A better solution for chargeback fraud prevention is at your fingertips. Contact us today to learn more about how we can optimize your fraud management efforts.

FAQs

What is chargeback fraud prevention?

Chargeback fraud prevention involves implementing strategies to identify and mitigate fraudulent chargeback claims, where customers dispute legitimate transactions to obtain refunds without returning the purchased goods. This helps protect businesses from financial losses and maintains the integrity of the transaction process.

How do you defend against fraud chargebacks?

To defend against a chargeback, gather and submit compelling evidence that the transaction was legitimate, such as order confirmations, delivery tracking, and communication records with the customer. This documentation can help prove the validity of the sale and refute the chargeback claim.

What is an example of chargeback fraud?

Chargeback fraud occurs when a customer purchases an item online and falsely claims they never received it, requesting a refund through their bank. Despite the item being delivered and received, the bank reverses the charge, leaving the merchant at a loss.

Is chargeback fraud a felony?

The short answer is it depends. Chargeback fraud can be considered a felony, depending on the jurisdiction and the amount of money involved. Serious cases may lead to criminal charges, including fines and imprisonment, as it is a form of theft and fraud.

Who pays for chargeback fraud?

The merchant typically pays for chargeback fraud, as they lose both the product and the revenue from the sale. Additionally, they may incur chargeback fees and increased processing costs from their payment processor.

Chargeback Fraud Prevention10 Best Practices to Build Into Your Business to Stop Dispute Abuse

In a Nutshell

The Top 10 Tips for Chargeback Fraud Prevention

Recommended reading

How Does Chargeback Fraud Work?

A 10-Step Strategy for Chargeback Fraud Prevention

#01 Optimize the Customer Experience

How to Do It:

#02 Perform “Red Flag” Reviews

How to Do It:

#03 Create a Blacklist

How to Do It:

#04 Confirm Orders Before the Sale

How to Do It:

#05 Confirm Orders After the Sale

How to Do It:

#06 Track Your Orders

How to Do It:

#07 Send a Reminder

How to Do It:

#08 Limit Transaction Velocity

How to Do It:

#09 Simplify Your Return Policy

#10 Define Your Return Policy

How to Do It:

Chargeback Fraud Prevention: Can I Do it on My Own?

Efficiency

Reporting

Agility

Experience

Insight

ROI

Using the Right Tools to Prevent Chargeback Fraud

Chargeback Alerts

Order Insight

Consumer Clarity

Visa Rapid Dispute Resolution

Mastercom Collaboration

FAQs

What is chargeback fraud prevention?

How do you defend against fraud chargebacks?

What is an example of chargeback fraud?

Is chargeback fraud a felony?

Who pays for chargeback fraud?

Chargeback Fraud

Return Fraud

First-Party Misuse

Information

Information

Resources

Company

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