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6 Ways to Protect Your Business from Chargeback Fraud

Chargeback Fraud: Woman's hands holding credit card and typing
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  • 6 Ways to Protect Your Business from Chargeback Fraud

Chargeback fraud is growing. here’s how to protect your business.

What Is a Chargeback?

Chargebacks happen when a purchase is reversed and a consumer gets their money back because of a dispute initiated with their card company. Originally, the concept was intended to help instill confidence in debit and credit card security, as well as to provide a layer of protection to consumers. Today, a consumer could dispute a purchase on their bill for a variety of reasons:

  • They don’t recognize the charge on their card
  • The customer never received their purchase or they were billed incorrectly
  • They feel the product or service they paid for was not as promised
  • Their information was stolen and is being used fraudulently
  • A merchant’s return policy is unclear, and a customer is not sure how to otherwise initiate a return

How Do Chargebacks Work?

Chargebacks are initiated when a customer reaches out to their credit card company to dispute a purchase on their bill. When they open the dispute, they must indicate why they feel the charge is an error and provide proof of their position. In an effort to keep cardholders happy, the majority of these disputes end up in favor of the customer as a chargeback.

Chargeback Fraud Is on the Rise

A greater concern for businesses is the fact that chargebacks have been increasing by 20% year over year. The number one reason for chargebacks is fraud, including transactions the cardholder did not initiate, but were made using stolen information. There has also been an increase in what is called “friendly fraud,” where a card may be used by a family member unbeknownst to the cardholder or a consumer doesn’t recognize a charge on a statement because the merchant used a different name. When the cardholder sees the charge they don’t recognize, they initiate a chargeback dispute, not realizing that the purchase was legitimate.

Chargeback fraud is a serious concern for businesses, and the impacts should not be taken lightly. Not only can a business lose the money on products and services sold, there are fees associated with chargebacks that end up being the merchant’s responsibility. Additionally, if a merchant is hit with too many chargebacks, they could end up losing the ability to process card transactions altogether.

How to Protect Your Business From Chargeback Fraud

Here are six ways to be proactive about avoiding chargebacks:

1. Keep Up-to-Date on New Chargeback Codes

Did you know that chargeback reason codes are not static or permanent? In 2021, each card network has a new set of chargeback reason codes, or the categories available to indicate the reason for a consumer dispute when they are requesting a refund or chargeback.

It is critical that merchants stay up to date on new chargeback reason codes so that they can properly advocate for themselves if something is amiss. If a consumer indicates that the charge was fraudulent, for instance, but a merchant has evidence that proves otherwise, they can dispute the consumer’s dispute and potentially overturn the chargeback. Additionally, keeping abreast of chargeback reason codes can help you understand why consumers are requesting chargebacks in case there is a recurring theme that you can find a solution for.

2. Maintain Precise Documentation of All Card-Based Transactions

Some of the best evidence when disputing chargebacks can come in the form of signatures and receipts. Keeping meticulous records of transactions can help you in the long run, especially if you have physical records like these. However, with the growing volume of ecommerce-based transactions, having physical documentation or signatures is not always feasible. In this case, be sure to keep records or utilize a technology solution that can keep records around card-based transactions, to include the date and time of the transaction or IP address the transaction came from.

3. Leverage Technology Designed to Protect You from Chargebacks

Authentication methods like 3D Secure were created by Visa and Mastercard in an effort to add more security to the card acquisition process and to protect merchants from chargeback liability. This authentication protocol instead shifts the liability to the card issuer, as opposed to chargebacks landing on the merchant for responsibility.

Additionally, when businesses invest in fraud protection technology, it can help them identify chargeback fraud opportunities before they occur, by identifying high-risk transactions and allowing the business to create custom rules for transactions it will and won’t accept, whether it’s concern over specific IP addresses or blocked countries. Having an always-on fraud protection partner can seriously reduce your risk of disputes stemming from fraud overall.

4. Ensure Your Team Is Well-Trained on the Guidelines Issued by Your Payment Processor

When your team understands payment processor compliance protocol, they will be better prepared to spot suspect activity as it is happening. Training your team in transactions both when a card is present and when a card is not present can stop fraud before it’s in motion, which is a merchant’s best line of defense. Secure payment processes exist to protect businesses. Regularly train your team on compliance in order to better identify risk when they see it.

5. Stay Consistent with Your Payment Descriptions and Merchant Name

If a customer doesn’t recognize the charge on their card, a dispute may be their first turn. It can cause panic for consumers when they don’t recognize a name or recall making a purchase, sending them into damage control mode in the event that their cards or identity were stolen. Merchants can mitigate this simply by ensuring that the company name that shows up on a charge matches the company name that the consumer recognizes. This is an easy fix that could save your business from serious chargeback hassles and costs in the long run.

6. Respond to Customer Service Issues Promptly

81% of consumers initiating disputes admit that they do this out of convenience, making it imperative that merchants make it just as convenient for customers to get their issues resolved directly with the merchant. With “friendly fraud” rates expected to top $130B in damages from the last year, it’s critical that merchants take every possible preventive measure to eliminate fraud opportunities before they happen. One way to do this is to provide 24/7/365 customer support, allowing customers to reach out to your business directly to settle concerns over product or service quality, delivery delays, or return policies that they may otherwise be unclear about.

Not all businesses may be able to provide this level of support availability to their customers, however. In these cases, it is critical that merchants and their teams respond quickly to all customer service queries and concerns. Making return policies clear on the business website, along with answers to other frequently asked questions, is another good way to circumvent confusion or concern around purchases.

Chargeback Fraud Is a Serious Concern

In today’s digital marketplace, an increasing number of transactions are occurring without cards present, making chargeback fraud risks even more of a concern. In 2019, businesses lost 4.4% of their revenue to chargebacks, making a sizable impact to their bottom line. With merchants only receiving dispute resolution judgments to their advantage 56% of the time, it is more important than ever that they take action into their own hands by preventing fraud from the start. Whether protection comes through protocol process training, building more open lines of communication with consumers, or investing in fraud protection technology, merchants need to be aware of this growing threat to their bottom line.

Chargeback Fraud Can Seriously Hurt Your Business: Protect Your Business with Rapyd Protect

Using the multifaceted fraud protection available through Rapyd Protect, you can have greater safety from the risk of fraud, no matter where you do business or what payment methods you accept.

 

Sources:

Business Insider. (2020, 3 3). “Friendly Fraud” Expected to Top 130 Billion in 2020–Chargebacks Hurting Merchants and Consumers. Markets Insider. https://markets.businessinsider.com/news/stocks/friendly-fraud-expected-to-top-130-billion-in-2020-chargebacks-hurting-merchants-and-consumers-1028959185#:~:text=to%20BI%20Prime-,%22Friendly%20Fraud%22%20Expected%20to%20Top%20130%20Billion%20in%202020%2D%2

Chargeback Gurus. (2020, 12 2). Chargeback Reason Codes by Network – 2021 Guide. Chargeback Gurus. https://www.chargebackgurus.com/blog/a-definitive-guide-to-chargeback-reason-codes-by-card-network

Chargebacks911. (2019, 2 8). Chargeback Stats. Chargebacks911. https://chargebacks911.com/chargeback-stats/

FinTech Magazine. (2020, 12 10). Merchants report rise in friendly fraud from mobile payments. FinTech Magazine. https://www.fintechmagazine.com/fraud-and-cybersecurity/merchants-report-rise-friendly-frauhttps://www.fintechmagazine.com/fraud-and-cybersecurity/merchants-report-rise-friendly-fraud-mobile-paymentsd-mobile-payments

Juniper Research. (2020, Unknown Unknown). Online Payment Fraud Whitepaper. Experian. http://www.experian.com/assets/decision-analytics/white-papers/juniper-research-online-payment-fraud-wp-2016.pdf

MerchantScout. (Unknown). What are the best ways to prevent chargebacks? MerchantScout. https://www.merchantscout.com/how-to-prevent-chargebacks

Midigator. (2020, Unknown Unknown). ANNUAL CHARGEBACK REPORT & STATISTICS. Midigator. https://midigator.com/chargeback-report-statistics/

Payment Depot. (2020, September 8). How to Fight and Prevent Credit Card Chargebacks in Your Small Business. Payment Depot. https://paymentdepot.com/blog/fight-prevent-credit-card-chargebacks-small-business/

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