Top Tips to Prevent Chargeback Scams & Stop Customer Dispute Abuse
Chargeback scams adversely affect everyone. Merchants get hit the worst, but consumers and banks pay the price, too. While the system aims to protect consumers, it's being exploited through loopholes, causing higher costs and more work for all involved.
First, let’s clarify what we’re talking about here.
A chargeback scam, also known as “chargeback fraud” or “first-party chargeback abuse,” occurs when an individual makes a purchase using their own credit or debit card. However, that user later contacts their bank to dispute the charge after receiving the purchased item or service.
The bank, seeking to protect its customer, initiates a chargeback and reverses the transaction to refund the cardholder's money. The scammer keeps the goods and the money. The merchant is then left to bear the financial loss, and may also face additional fees and reputational damage due to increased chargeback rates.
This post will unpack common chargeback scams and provide tips to help reduce your risk.
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Chargeback Scams vs. Friendly Fraud
Not all first-party misuse of chargebacks is the same. Individuals filing invalid chargebacks may have different intentions and go about different practices. For instance, while “chargeback scam” and “friendly fraud” are sometimes used interchangeably, they are actually quite different:
A deliberate act of deception on the cardholder’s part. A person knowingly makes a purchase with the intention of initiating an unjustified chargeback after receiving the goods or services. Their preconceived, deliberate goal is to keep both the product/service and the money.
This term is more ambiguous in intent. Friendly fraud occurs when a legitimate customer initiates a chargeback, which may result from misunderstandings, forgetfulness, or other errors. This is why it’s called “friendly” fraud.
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A chargeback scam is a premeditated act of fraud against a merchant. Friendly fraud, however, is usually unintentional. For instance, a customer might not recognize a transaction on their statement because the billing name differs from the merchant’s “doing business as” title. Or, a family member might make a purchase without the cardholder's knowledge. The cardholder then sees the charge on their statement, assumes it’s fraudulent, and files a chargeback.
The result is the same as a chargeback scam, as the merchant loses both the money and the product/service. However, the motivation makes the matter more complicated than it seems at first glance.
5 Most Common Chargeback Scams
Technology has made it easier than ever for customers to take advantage of the dispute system at merchants’ expense.
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. The buyer then calls 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 purchase an item, 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, who provides the correct address at that point. The package is successfully delivered… but that doesn’t stop the cardholder from calling the bank and claiming they did not receive the order.
Another variation of this scam involves a variation on porch theft. A scammer uses stolen cardholder information to have a product shipped to a neighbor’s house and then watches for the order to arrive. The package is quickly retrieved from the neighbor’s porch, after which the cardholder calls the bank to report the fraud.
THE SCAM: The buyer 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 before ordering.
It’s hard to prove you shipped the correct item and that it reflected the customer’s expectations. If the order was wrong, the customer is supposed to have called you before contacting the bank. Unfortunately, this doesn’t always happen. The issuer, wanting to keep their customer happy, may simply go along with the claim.
It can be hard to disprove the claim if the cardholder is deliberately trying to scam you. You’re basically trying to prove a negative in that you need evidence that you didn’t disappoint the buyer.
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 wants to abuse the process to steal from you deliberately. However, it can be harder to identify because whatever claim the cardholder makes, you can’t gauge their motivation.
Even if caught, there’s not necessarily a way to prove that a cardholder intended to file a chargeback beforehand. They may be able to play it off as a simple misunderstanding.
THE SCAM: A buyer requests a refund, then files a chargeback before the refund can be finalized, resulting in a double refund.
HOW IT’S DONE: A fraudster tracks a product they had returned to you and then files a chargeback just before you receive the item, claiming the return was not processed. If you actually process the refund, the scammer may end up with a double refund
Another way this works is that the consumer contacts the bank and initiates a dispute. The same customer then contacts you and requests 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 a subscription.
HOW IT’S DONE: Your customer claims you billed their credit card after they canceled the service. Perhaps they meant to cancel or didn’t, or they believed the subscription had been canceled. The result is the same either way: the customer uses the chargeback process as a way to end a service agreement.
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 and then claims the subscription has been canceled. The scammer gets the merchandise and a refund while you simply get burned.
Keep in mind that, for the most part, these people are not professional criminals. They’re otherwise-legitimate customers that have simply come to see chargeback scams as an innocent act, or at worst, a “victimless” crime.
In most cases, it’s best to presume good faith on the part of the buyer. This can be tough, though, when you consider that some of them might be deliberately stealing from you by abusing the chargeback process.
How to Prevent Chargeback Scams
There is no single “one-size-fits-all” method to stop all chargeback scams. However, you can implement several basic best practices to keep from being a victim:
Prevention is always the best outcome. However, considering that some of the people behind chargeback scams are dedicated fraudsters, prevention may not always be possible.
That why you need to respond to all chargeback requests, and engage all chargeback fraud through the representment process.
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How to Fight Chargeback Scams
Representment is your best bet against friendly fraud and chargeback scams. For instance, if a customer scams you on a $20 item, challenging the chargeback may not always seem worth it. But, banks often assume that, if you don’t fight back, then you must really be responsible.
You can improve your reputation with issuing banks by disputing all friendly fraud chargebacks. To do this, you need to:
It’s true that chargebacks are part and parcel 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.
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. A bank can reverse a chargeback through a process called representment, where the merchant disputes the chargeback by providing compelling evidence supporting the validity of the original transaction. If the merchant's evidence is deemed sufficient, the bank will reverse the chargeback, reinstating the original charge to the customer. This process aims to ensure fairness and accuracy in transaction disputes.
Are chargeback fraud and friendly fraud the same thing?
No. Chargeback fraud is a deliberate act by which a customer falsely claims a transaction was unauthorized, intending to retain both the product and the refunded money. On the other hand, friendly fraud 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.