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What is Chargeback Fraud and How to Avoid It

Businesses lose billions of dollars annually to chargebacks, a fast-increasing portion resulting from fraud. But what precisely is it, and what does it imply for future business owners?

How Do Chargebacks Work?

When a customer disputes a charge, the issuing bank or payment processor will normally reverse the transaction. Some chargebacks result from the company allowing a fraudulent payment transaction to complete. Even if a chargeback is overturned, businesses have still assessed a fee. A business often goes through a protracted dispute process if it chooses to oppose a chargeback.

The company must reimburse the client for the charge if the dispute procedure concludes in a decision in the customer’s favor. Therefore chargeback fraud management is important for companies and needs experts’ help and solutions to tackle it. 

Chargeback fraud: What Is It?

Fraudulent chargebacks occur when a person deliberately disputes a valid payment transaction with the issuing bank or payment processor, leading to a chargeback. People engage in chargeback fraud mainly to receive a refund and keep the merchandise (s). They will justify contesting an actual transaction. For instance, they could claim that they:

  • Never got the item(s) they ordered (also known as “item not received” abuse; INR).
  • Never give permission for the transaction.
  • Items weren’t as mentioned on the website, or I received the wrong ones.

Instead of getting in touch with the firm where they made the purchase, the customer willfully starts a chargeback, effectively stealing goods from the company.

Friendly Fraud Versus Chargeback Fraud

Although they differ, the terms chargeback fraud and friendly fraud are frequently used synonymously. The intent is the main distinction between these two types of fraud. Friendly fraud typically happens due to a consumer’s sincere error, whereas chargeback fraud is hostile conduct.

Friendly fraud perpetrators frequently give sincere justifications, such as:

  • The company name on their credit card statement was unfamiliar to them.
  • They failed to remember what they had bought on the website or app.
  • The cardholder’s credit card was used to purchase by a member of their immediate family, and they contested the transaction because they weren’t aware of it.
  • They were unsure of the merchant’s return policy and believed they could instead perform a chargeback.

Typically, those who engage in chargeback fraud avoid contacting the retailer. In contrast, persons who commit friendly fraud frequently approach the company directly and convey their disagreement with the transaction.

Companies Must Maintain A Low Chargeback Rate For Chargeback Fraud Management

Companies must maintain a low chargeback rate. They run the risk of incurring hefty costs if they don’t. Or even worse, they are unable to accept any major credit cards. Businesses find it difficult to maintain a low chargeback rate because both friendly and chargeback fraud are on the rise.

Many merchants regarded a 1% chargeback rate as the acceptable cutoff point; however, that is no longer the case. The chargeback rate threshold for Visa is 0.9% of transactions at the time of writing. It is a condition of Mastercard that the chargeback rate does not exceed 1.5% of transactions.

Different chargeback rate thresholds apply to the major credit card processing networks Visa, Mastercard, Discover, and American Express. High chargeback rates result in costs and penalties from these credit card processing networks. The permissible chargeback rate is based on several variables, and each credit card processor uniquely determines the rate.

To give businesses that run the risk of being included in Visa’s Dispute Monitoring Program (VDMP) an opportunity to lower their chargeback rate, Visa can send out early warnings to those businesses. They can escape being placed in the VDMP if they can rapidly lower their chargeback rate. However, companies who instantly surpass the Visa barrier cannot get an early notification. As of the time of writing, MasterCard does not have an early warning mechanism for excessive chargebacks.

Although Visa’s early warning system is useful, it won’t lower your chargeback rate or stop chargeback fraud.

What You Can Do to Cut Down on Chargebacks 

You can take several actions to lessen chargebacks, whether they are the result of chargeback fraud or friendly fraud:

Use Real-Time Decision-Making To Combat Fraud.

Rule-based systems are frequently circumvented by fraudsters, resulting in more company chargebacks. Chargebacks are avoided because of real-time fraud decisioning, which stops criminals before they can authorize payments. Additionally, suppose the decisioning engine has access to a global merchant network. In that case, it may evaluate the identity of each transaction and properly forecast the likelihood that chargebacks or friendly fraud would result from a transaction.

Authentication Should Be Strong.

Fraudsters frequently use phishing scams and dark web markets to get credit card information. The security code is not usually printed on the back of the card. Therefore, whenever a consumer uses a credit card to pay for an order placed on your website, you must always request the CVV code. Two-factor authentication (2FA) implementation can assist in stopping fraudsters from accessing user accounts and making illicit online purchases. Many companies offer 2FA on their e-commerce websites using 3DS technology.

Always Express Yourself Clearly.

Make sure the billing description appears on your customers’ credit card statements and is easily identifiable. Make it simple for customers to contact your company and inquire about transactions. Before customers purchase from your site, explain your return policies and automatically abide by them. Automated order notifications will make it easier for clients to remember their purchases and prevent unintentional disputes. Customers may follow their orders in real time by establishing a shipment tracking system, and you can use it to demonstrate that customers received their purchases.

To Conclude: A Contemporary Fraud Prevention Solution is Required

You can lower your chargeback rate by taking the actions we’ve listed above. To combat chargeback fraud, however, you need a cutting-edge fraud detection tool that automatically recognizes risky transactions for your company.

In 2023, it’s anticipated that chargeback expenses will total more than $117 billion, with merchants responsible for $79 billion of those losses. Fortunately, Fraud Prevention Solution can help you avoid both friendly and criminal chargebacks, significantly lowering costs and boosting your company’s earnings.

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