Businesses worldwide lose billions annually due to chargebacks, and a significant and growing portion result from chargeback fraud. It’s a problem every online business must deal with at some point, and many companies see fraudulent chargebacks occurring every day.
What Exactly Is Chargeback Fraud?
Chargeback fraud is where an individual deliberately disputes a legitimate payment transaction, resulting in a chargeback for the company where the sale was made. Instead of contacting the business where they placed the purchase, the customer goes through the issuing bank or payment processor – essentially stealing an item or items using the chargeback process.
Chargebacks often occur because of criminal behavior on the buyer’s part, with chargeback fraud being one of those behaviors. Another criminal behavior that causes chargebacks is using stolen credit card numbers to pay for purchases.
The Consequences of a High Chargeback Rate
Failing to keep your chargeback rate low means you risk getting hit with high fees and penalties from credit card networks like Visa, Mastercard, and American Express. If your chargeback rate remains too high for too long, you risk getting relegated to one or more chargeback monitoring programs. Every chargeback monitoring program you enter brings additional costs on top of the fee for every chargeback. If you continue to have a high chargeback rate despite monitoring, you could lose your ability to accept credit cards altogether.
What is considered a high chargeback rate?
For a long time, the rule of thumb was that a 1% chargeback rate was the acceptable threshold for most credit card networks, but today that is no longer the case. Currently, the chargeback rate threshold for Visa is 0.9% of transactions, and the threshold for Mastercard is 1.5% of transactions.
» See how Forter can help resolve chargeback disputes intelligently and efficiently with Smart Claims
What Can You Do About Chargeback Fraud?
Criminal behavior like chargeback fraud increases your chargeback rate, so you need to take steps to protect your business from it, such as:
1) Add Real-Time Fraud Decisioning to Your Platform
You can reduce chargebacks by incorporating real-time fraud decisioning into your platform. With real-time decisioning, your eCommerce platform can make accurate fraud decisions before the user goes through checkout and payment authorization. If the decisioning engine has access to a global network of merchants, it can assess the identity behind each transaction. With insight into the user’s identity, the engine can accurately predict which transactions will likely result in chargeback fraud and block them. A bad actor can’t initiate a chargeback if they don’t make it through the payment process.
2) Use Strong Authentication Tools
You can help reduce chargebacks due to criminal behavior by using strong authentication tools, such as:
- Two-Factor Authentication (2FA): If any of your customers find that their accounts — with stored payment methods — have been taken over and orders placed without their consent, they’ll file chargebacks. Requiring customers to enable two-factor authentication (2FA) for account logins can help prevent fraudsters from taking over customer accounts and placing unauthorized orders. You can implement 2FA on your website using technology like 3D Secure (3DS).
- CVV Validation: Fraudsters often obtain stolen credit card numbers from dark web marketplaces or phishing scams. However, they don’t always have the card verification value (CVV or CVV2) number on the back of the card. You should always require customers to enter the CVV number at checkout and use a reliable tool to validate that number. For example, Stripe Radar lets you perform a card verification code check (CVC) on each payment transaction and block payments that fail the check.
- Address Verification Service (AVS): An address verification check is another way to validate credit card information, helping to detect suspicious payment transactions. An address verification service (AVS) looks at the billing address entered by the user, ensuring it matches the address on file with the credit card issuer. AVS checks are not supported by all credit card companies and are not available for all countries.
3) Purchase Chargeback Protection
In general, a chargeback protection service lets you shift the liability of unauthorized transactions and fraudulent payment disputes from your business to the chargeback protection provider. Many fraud prevention companies and payment processors offer chargeback protection, with different levels of protection and associated costs.
Some chargeback protection services use an automated process for inspecting transactions while offering a “chargeback guarantee.” If a transaction ends in a dispute, the service provider reimburses the business for the chargeback fee and conditional refund. Some companies will fight disputes on behalf of the business, covering the cost of each disputed charge and the chargeback fee.
With chargeback protection, you don’t have to worry about getting hit with high fees and penalties from credit card networks. You can also spend less time and resources managing disputes and more on tasks that generate revenue for your business.
Need Help Preventing and Defending Chargebacks?
Total chargeback costs are expected to surpass $117 billion in 2023, with $79 billion of those losses coming at the hands of merchants. Luckily, with Forter, you can avoid both friendly and criminal chargebacks, meaning a significant cost reduction and increased revenue for your business.
And now, with our Smart Claims add-on for Trusted Conversions, Forter can alleviate the operational burden of disputing chargebacks by supporting merchants through the chargeback representment process. This enables merchants to streamline back office operations to resolve disputes intelligently and efficiently – improving win rates and recovering lost revenue.