Chargeback Fraud Prevention

February 28, 2022 | 10 min read

Chargeback Fraud Prevention

The Top 10 Tips for Chargeback Fraud Prevention

Imagine you own a bicycle  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 hard to get away with in a brick-and-mortar store. It happens to online merchants all the time, though.

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, merchants lost more than $20 billion to criminal fraud attacks in 2021.

There's good news, though: you don’t have to be a victim.

In this post, we’re taking a look at chargeback fraud prevention. We’ll discuss what chargeback fraud is, how to recognize it, and steps you can take to keep from becoming another statistic.

How Does Chargeback Fraud Work?

Chargebacks were created as a consumer safeguard against credit card fraud. As technology has evolved, however, the chargeback system has not kept pace.

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

Many illegitimate chargebacks result from mistakes or misunderstandings. A cardholder who doesn’t recognize a charge, for example, or one who thinks a chargeback and a refund are the same thing. In contrast, deliberate chargeback fraud is a premeditated practice. Since the fraud originated by the cardholder themselves, it's also often referred to as first-party fraud.

We’re seeing more and more chargebacks filed by bad actors with malicious intent. Banks are being asked to force refunds that cardholders know are unwarranted. And, just like our example above, the consumers want their money back, but have no intention of returning products purchased or services rendered.

Here are a few common examples of chargeback fraud:

  • The cardholder wants a refund, but doesn’t want to pay restocking or handling fees.
  • The cardholder experiences “buyer’s remorse” and regrets making a purchase.
  • The cardholder feels the return process is too slow or complicated. They assume it’s easier to deal with the bank.
  • The consumer waited too long to request a refund, and the return time limit has expired.
  • A family member made the purchase, but the cardholder doesn’t want to pay the bill.

What is Chargeback Fraud Prevention?

Chargeback Fraud Prevention

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Chargeback fraud prevention is the practice of identifying and blocking cardholders who attempt to file fraudulent chargebacks at the merchant’s expense.

The strategies you use 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. It’s possible to tighten your fraud filter parameters, but false declines will cost you far more than you’ll save.

Chargeback fraud prevention requires a much more involved approach. It touches on customer service, data organization, and fraud mitigation technology.

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

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How Can Merchants Prevent Chargeback Fraud?

That’s the key question: how do you prevent chargeback fraud from happening?

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 towards chargeback fraud prevention.

02 | Perform ‘Red Flag’ Reviews

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

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.

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 that they received something different than what was ordered, you’ll have evidence to refute the claim.

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.

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.

07 | Send a Reminder

It’s not your fault if a customer forgets to cancel a subscription. That doesn’t mean you won’t get blamed, though. 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.

08 | Limit Transaction Velocity

Just like with other criminal fraud tactics, it’s not uncommon for cyber shoplifters to complete multiple transactions in quick succession, then request chargebacks later. Watch for high transaction velocity, and consider placing a limit on the number of orders a buyer can complete in a 24-hour period.

09 | Simplify Your Return Policy

Complex return rules may discourage buyers from asking you for a refund, but that just means they’ll turn to the bank. Make returns hassle-free, and prominently display your return policy anywhere a buyer would expect to find it.

10 | Define Your Return Policy

Consider putting a confirmation button or checkbox on your checkout page. Buyers confirm (by clicking) that they have read and understood your terms and policies before the transaction can be processed. While this isn’t airtight, it can at least help deter some cases of chargeback fraud.

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

The tactics outlined above are a step in the right direction. To most effectively prevent chargeback fraud, though, you really need a two-fold strategy. You must prevent chargebacks whenever possible, and contest invalid claims whenever appropriate.

That can be much harder than it sounds. Successful chargeback fraud prevention can be a complicated, time-consuming, and resource-heavy endeavor. In-house strategies may be capable of addressing easy-to-manage issues; the “low-hanging fruit,” as it were. The problem is usually bigger than that, though.

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 you’re using existing resources and eliminating 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.

Getting the Full Picture on Chargeback Fraud Prevention

Even if you could prevent chargeback fraud in 100% of cases…it still wouldn’t be enough.

There are other types of fraud you’ll be facing, each with its own triggers and prevention tactics. That’s why any truly effective fraud management strategy must be both multi-tiered and customized to your unique needs.

A good strategy must aim to prevent both intentional and unintentional post-transaction fraud. It also needs to tackle criminal fraud and affiliate fraud, and should include plans to relentlessly fight back against bad chargebacks and recover revenue.

Can your fraud prevention strategy do all that?

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.

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