Credit Card Dispute Fraud

April 22, 2020 | 7 min read

credit card dispute fraud

Your Customers Are Engaged in Credit Card Dispute Fraud Without Even Realizing It

Credit card dispute fraud. That’s what happens when an important consumer protection mechanism is twisted into a tool to commit fraud, rather than prevent it. It costs merchants plenty, but how do buyers get away with it?

Consumer abuse isn’t something you have to take lying down. In this post, we’ll explore this complex issue and reveal its long-term financial impact. Plus, we’ll uncover why it keeps happening, and what you can do to prevent attacks and protect your bottom line.

What is Credit Card Dispute Fraud?

When a customer makes a credit card purchase, that individual is guaranteed a certain level of protection under federal law. In the US, the 1974 Fair Credit Billing Act guarantees cardholders a means to dispute their billing via a chargeback. Similar legislation exists in other markets to offer the same level of protection.

The goal of the chargeback system is to give consumers a way to recover their money in case of fraud or merchant abuse. The customer could contact the issuing bank and explain the situation, and the bank would then draw back the funds and return them to the customer’s account. Unfortunately, though, more and more cardholders are using chargebacks as a channel for engaging in credit card dispute fraud.

Credit card dispute fraud describes a situation in which a cardholder files a chargeback without proper justification. While it’s a vaguely defined concept, it typically falls into one of a few different categories:

Friendly Fraud

Friendly Fraud

The buyer authorized the purchase, then later decided to file a chargeback. This could result from numerous factors including buyer’s remorse, miscommunication, or poorly-defined merchant policies.

Family Fraud

Family Fraud

A friend or relative of the cardholder completes a purchase without the cardholder’s authorization. The cardholder, not realizing what happened, assumes the transaction is fraudulent and requests a chargeback.

Cyber Shoplifting

Cyber Shoplifting

The cardholder completes a purchase with the premeditated intent to file a chargeback. The buyer knowingly steals goods or services, using a chargeback as a way to get something for free.

Of course, the end result is the same, regardless of the buyer’s intent: you, the merchant, will lose sales revenue and the cost of any goods or services. You’ll also pay extra fees, while your overhead increases. Worst of all, you could lose your ability to process payment cards altogether if your chargeback ratio exceeds acceptable levels on any card network.

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Rising Cost of Chargeback Abuse

This isn’t a new problem. We’ve observed significant increases in the cost of chargebacks year over year; most of that increase is attributed to chargeback abuse.

Merchants like you are already projected to lose $50 billion to credit card dispute fraud every year by the end of 2020. Of course, that figure only accounts for the direct loss sources mentioned above. When you factor in the ancillary costs connected to a long-term increase in chargebacks, the total is much higher:

False Declines

False Declines

Merchants adopt stricter standards for fraud detection in response to increased disputes. As a result, more legitimate sales end up getting flagged and declined.

Return Fraud

Return Fraud

A return is better than a chargeback. Merchants are more willing to accept returns—even when not warranted—than to risk a chargeback. But the sale is still lost.

Threats to Sustainability

Threats to Sustainability

The restrictions and higher costs associated with chargebacks can do long-term damage to businesses, and may even jeopardize their survival.

Lower Conversion

Lower Conversion

Merchants increase prices to offset their rising costs related to chargebacks. In turn, consumers tend to buy less (when they buy at all).

With all these different threat sources considered, the total financial impact of chargebacks could be well over $150 billion every single year. And, as card-not-present transactions become the norm for the digital marketplace, costs will only continue creeping upward.

Chargeback regulations simply haven’t kept pace with changes coming to the market. The chargeback process was developed before the arrival of eCommerce, and was intended for a card-present space. The existing procedures and regulations can’t keep pace with new developments.

How to Prevent Credit Card Dispute Fraud

Cardholders want convenience. If they perceive credit card dispute fraud as the fastest and easiest way to get what they want…that’s the way they’ll go. The best solution to stop this kind of abuse is to prevent credit card dispute fraud before it happens.

There are several steps you can take to help minimize credit card dispute fraud incidents, including:

  • Notifying customers before charging for recurring payments.
  • Making sure the billing descriptor is easily recognizable.
  • Using delivery confirmation.
  • Keeping a well-organized paper trail of every transaction.
  • Communicating regularly with customers.
  • Granting refunds and cancelations as soon as requested.
  • Being on the lookout for any type of suspicious behavior.

These practices can go a long way towards preventing unnecessary disputes. Of course, this still won’t cover all chargeback triggers connected to threats like friendly fraud and family fraud. Plus, there’s no way to effectively prevent cyber shoplifting, as the entire premise is based on the buyer’s intent to file a chargeback before making a purchase.

We’re not saying there’s nothing you can do about credit card dispute fraud. In fact, you have several options for recovering revenue and protecting your bottom line. All you need is a comprehensive strategy to contend with these threats as post-transactional factors.

The Best Solution is Comprehensive

You may be unable to prevent these buyers from engaging in chargeback abuse…but you can stop them from succeeding. That’s why engaging in the dispute representment process is the best approach to deal with chargeback abuse.

Representment is the process of resubmitting a transaction to the issuer. You’ll also need to provide additional information that refutes the customer’s claim. If you think of it like a court case, you’re essentially arguing your side of the story in front of a judge (the issuer).

The representment process is not easy, though; it’s complicated and time consuming, and you’re required to operate within a very limited timeframe. You must also stay up-to-date on changes to dense industry regulations, with hundreds of pages outlining chargeback procedures for each card brand. In most cases, your best option is to seek professional outside help.

Chargebacks911® offers a comprehensive chargeback mitigation solution. Our experts can precisely diagnose your chargeback sources and deploy the necessary tools and strategies to resolve the problem. We offer services aimed at:

  • Identifying simple errors and procedural oversights.
  • Eliminating risk posed by criminal fraud.
  • Deploying alerts to identify and prevent disputes.
  • Engaging in tactical representment to recover funds from friendly fraud and cyber shoplifting.

All Chargebacks911 services are backed by a 100% ROI guarantee: if you don’t recover money, you don’t pay.

You can make credit card dispute fraud a thing of the past with Chargebacks911 at your side. Ready to see how much you could save? Click the link below and get started today.

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