What is Chargeback Fraud?

Written By Alla Levin
August 02, 2021

What is Chargeback Fraud?

Fraudulent customers call their bank or credit card company to get money back from a legitimate purchase they made through their site. This happens a lot to online business owners and eCommerce stores, especially because people nowadays tend to shop for everything online. A chargeback can be legitimate when a client makes an innocent mistake and does not recognize a purchase on their credit card and bank statements.

This is normally referred to as friendly fraud. A chargeback can also be illegitimate when a client calls their bank or credit card company and asks for their money back for a purchase they made. In which case, this will be referred to as chargeback fraud.

Fraudulent clients get their money back by claiming they never received your order or that they sent back the item and the money was never processed. Sometimes, they go to the extent of claiming that the product received was not as advertised or that they did not receive a payment for a cancel request.

How does chargeback fraud hurt your business?credit card company

When clients ask for a refund from their bank or credit card company, they get it immediately. The card issuers and banks are usually overwhelmed with chargeback requests which means they have little time to investigate them. In most cases, they will take their client’s word for it and process the request.

Once a chargeback request is processed, the money will automatically be deducted from the store’s bank account. The refund also comes with a fee, which can add up to a lot every time refunds are processed.

So as a business owner, chargeback fraud can lead to great financial damage. You will incur lost revenues, potential product shortages, expensive shipping costs, and eventually financially damaging chargebacks.

Ways to prevent chargeback fraud

Here is how to prevent chargeback fraud:

Use strong credit card verification methods

Chargeback and credit card fraud accounts for a large portion of the scams online businesses face.  As soon as online businesses began allowing clients/customers to make credit card payments for their online purchases, the amount of fraud became overwhelmingly great.

Chargebacks can be very costly for your business, which is why identity verification systems should be put in place. A simple way to do this is to revisit your ID verification steps and add more than one identification method. You could also implement automatic systems to check if the customer’s credit card billing address is the same as one stated by the bank or credit card company.

Confirm all orders before dispatching

Once a customer places an order from you, send them a confirmation email. This can be very helpful in preventing friendly chargeback frauds. It is evidence and also a reminder to both you and the client that they made the purchase.

If your clients make substantial orders, make several successful purchases consecutively, or has different shipping and billing addresses, it could be a cause for alarm. Check to ensure you are not sending your products out to organized crime rings, which will request a chargeback and retail the products, leaving you at a complete loss.

Document the conversations

Documentation is important to avoid allegations from the clients/customers. Keeping conversations or receipts on the purchases will help you refute any chargeback claims that are unfair or malicious. This could help you prevent chargeback fraud in your business.

Use anti-fraud tools for your business

Many frauds detection tools have features like device fingerprinting, 2-factor authentication, and velocity checking that could help you identify fraudsters in your client list. They spot red flags and suspicious orders and help you stop them before they commit any cybercrimes.

Put out a clear return policy

It would help if you always were transparent about your return policies. When setting up your site, make sure the policy is easily accessible to all your clients. Customers need to read and understand return policies before making any purchases. This will help you reduce instances of friendly chargeback fraud.

Shipment tracking

Having a shipment tracking system provides you and the client with constant updates on the delivery. Not only does it improve communication between you and the client, but it will also ensure accountability. This means that the customer will have a harder time falsifying a chargeback, and you will have evidence to refute any false chargeback claim.

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