Chargebacks cost e-commerce businesses billions every year, and a rapidly growing percentage of them are due to chargeback fraud. So, today we’re looking at what chargeback fraud is and steps you can take to prevent it.
What Is a Chargeback?
A chargeback is a reversal of a payment transaction by the issuing bank or payment processor, usually due to the customer disputing the charge. Some chargebacks occur as a result of the business allowing a fraudulent payment transaction to go through. Companies are charged a fee for every chargeback, even for chargebacks that are reversed. If a business decides to contest a chargeback, they typically go through a lengthy dispute process. If the dispute process results in a favorable ruling for the customer, the business must repay the customer for the charge.
What Is Chargeback Fraud?
Chargeback fraud is where an individual purposefully disputes a legitimate payment transaction by going through the issuing bank or payment processor, resulting in a chargeback. When people commit chargeback fraud, their primary goal is to get a refund while keeping the item(s). They will offer up an excuse for disputing a legitimate transaction. For example, they might say that they:
- Never received the item(s) they ordered (this is referred to as “item not received” (INR) abuse).
- Never authorized the transaction.
- Received the wrong items, or the items weren’t as described on the website.
The customer deliberately initiates a chargeback instead of contacting the business where they placed the purchase, essentially stealing items from the company via the chargeback process.
Chargeback Fraud vs. Friendly Fraud
The terms chargeback fraud and friendly fraud are often used interchangeably, but they are not the same. The key difference between these two types of fraud is intent. Chargeback fraud is a malicious act, while friendly fraud usually occurs because of an honest mistake on the part of the consumer.
People who engage in friendly fraud tend to offer honest reasons for doing so, such as:
- They didn’t recognize the company name on their credit card statement.
- They forgot they had made a purchase from the website or app.
- An immediate family member placed the purchase using their credit card. So, the cardholder disputed the transaction because they didn’t know about the purchase.
- They were confused about the merchant’s return policy and thought they could do a chargeback instead.
People who commit chargeback fraud will usually avoid contact with the company where they made the purchase. People who engage in friendly fraud tend to communicate openly with the business, explaining why they disputed the transaction.
You Need to Keep Your Chargeback Rate Low
Companies need to keep their chargeback rate low. Otherwise, they risk getting charged high fees. Or worse, they lose the ability to accept one or more major credit cards. Maintaining a low chargeback rate is challenging for businesses because they face rising levels of chargeback fraud and friendly fraud.
Many merchants consider a 1% chargeback rate the acceptable threshold, but that is no longer the case. At the time of publication, the chargeback rate threshold for Visa is 0.9% of transactions. Mastercard requires that the chargeback rate remains below 1.5% of transactions.
Major credit card processing networks like Visa, Mastercard, Discover, and American Express have different chargeback rate thresholds. Many factors go into calculating the acceptable chargeback rate, and each credit card processor calculates the rate differently. All of these credit card processing networks impose fees and penalties for high chargeback rates.
Businesses who are at risk of getting placed in Visa’s Dispute Monitoring Program (VDMP) can receive an early alert from Visa so that they have a chance to reduce their chargeback rate. If they reduce their chargeback rate quickly enough, they can avoid placement into the VDMP. However, businesses that immediately exceed Visa’s threshold may not receive an early warning notification. Mastercard does not offer an early warning system for excessive chargebacks at the time of this writing.
Visa’s early alert system is a helpful tool, but it won’t help you reduce your chargeback rate or prevent chargeback fraud.
Steps You Can Take to Reduce Chargebacks
There are several things you can do to help reduce the number of chargebacks, whether they stem from chargeback fraud or friendly fraud:
1) Implement Real-Time Fraud Decisioning
Fraudsters tend to find their way around rules-based systems, which means more chargebacks for the business. Real-time fraud decisioning stops bad actors before they go through payment authorization, preventing chargebacks. And if the decisioning engine has access to a global merchant network, it can assess the identity behind each transaction, accurately predicting when transactions could lead to chargeback fraud or friendly fraud.
2) Use Strong Authentication
Many fraudsters use phishing scams and dark web marketplaces to obtain credit card information. However, they don’t always have the security code from the back of the card. So, you should always require the CVV code when customers use a credit card to pay for orders through your website. Implementing two-factor authentication (2FA) can help prevent fraudsters from taking over customer accounts and placing unauthorized online orders. Many businesses use 3DS technology to enable 2FA on their e-commerce sites.
3) Always Communicate Clearly
Make sure your billing descriptor is clear and recognizable on your customer’s credit card statements. Create easy ways for customers to contact your business and ask questions about transactions. Explain your return policies clearly on your website and automatically apply those policies before customers buy from your site. Automated order confirmations will help customers remember their transactions so they don’t dispute them in error. Implementing a shipment tracking system allows customers to track their orders in real time, and you can use it to help prove that customers received their items.
You Need a Modern Fraud Prevention Solution
The steps we’ve outlined above will help you reduce your chargeback rate. However, you need a modern fraud prevention solution in place to combat chargeback fraud, one that can automatically identify transactions that pose a risk to your business.