Chargeback Fraud: How It Works & Common Types
Chargeback fraud is one of the most common struggles of many online businesses, and to fight it, it is important to understand what it really is. So, in this article, we will talk about the most common types of chargeback fraud and how it works, as well as the ways to prevent it.
Running a business is a challenging task. Companies face different challenges every day, trying to hold their place in the never-ending competition. One of the most common threats a merchant can encounter is fraud. There are various types of fraud; however, the type of fraud online sellers encounter the most often is chargeback fraud. In this article, we will explain what fraudulent chargebacks are, why chargeback frauds are dangerous, how chargeback frauds work, describe the most common types of these frauds, and share some valuable tips on chargeback fraud protection.
What Is Chargeback Fraud?
Chargeback is a transaction reversal issued by a cardholder who strives to return their money. Accordingly, chargeback fraud is a fraudulent credit card dispute initiated by a client trying to receive goods or services for free. While there are many cases where customers rightfully try to receive a refund for damaged products or insufficient services, a large percentage of chargebacks are initiated with malicious intent. Such fraudulent chargebacks result in lost revenue and additional fees, which can endanger the company's financial stability and further development.
How Does Chargeback Fraud Work?
Chargeback fraud is a conscious abuse of the refund system created to protect the customers'
rights. While most clients who deal with real issues related to their purchase try to
contact the seller first, chargeback fraudsters avoid referring to merchants and choose to
contact the credit card company directly, claiming the item they ordered wasn't delivered or
was damaged, they didn't gain access to services after paying for subscription, etc. In a
situation like that, the merchant, unaware of the dispute being initiated, cannot defend
their interests; later, the bank reverses the transaction, and the company loses
revenue.
To put it simply, chargeback fraud usually follows these steps:
- The customer receives goods or services paid via their credit card;
- The client contacts the bank, claiming the purchase was fraudulent, demanding a chargeback operation;
- The bank recognizes the issued fraudulent chargeback as legitimate and cancels the transaction, meaning the seller loses money.
It's pretty unpleasant to lose revenue and the product by itself. However, there are also other issues that occur due to chargeback frauds:
- Chargeback fees. When a refund is issued, the bank charges the company additional chargeback fees, leading to even larger monetary losses.
- Higher processing fees. A big amount of chargebacks might be a sign of the merchant's unreliability. Payment processing companies tend to charge potentially untrustworthy businesses larger processing fees to motivate sellers to change their approach and reduce the amount of issued chargebacks by providing better services.
- Client flow restriction. A large number of chargebacks might significantly lower your rating, making you an unreliable merchant in the eyes of potential customers. Striving to receive quality goods and services, clients will refer to other companies they consider more dependable.
- Reduced partnership opportunities. Chargeback frauds can also damage your reputation, meaning you become an undesirable partner for other businesses. Lack of quality business connections might have serious negative consequences that will restrict your company's development, sometimes resulting in the company's bankruptcy in the most severe cases.
Chargebacks are a severe issue businesses face regularly. That's why learning about chargeback fraud and how to prevent it is vital for both small and large merchant companies.
Types of Chargeback Fraud
There are many different types of fraud involving chargeback operations. Knowing the difference between various chargeback frauds and how they work is essential for choosing an efficient strategy for dealing with a particular refund problem. Here, we describe the most common types of chargeback fraud that many sellers deal with daily.
Friendly Fraud
What is a friendly fraud chargeback? This type of fraud occurs when the client obtains goods
or services and later refers to the credit card company claiming that goods or services
weren't delivered or provided. This way, the customer's demand for chargeback seems
legitimate, as it supposedly comes from an honest, "friendly" complaint about the merchant's
incompetence. There's a high chance to win such a chargeback dispute; however, these
chargeback frauds can significantly damage trust between the seller and customers,
negatively impacting the business' development.
Triangulation Fraud
Triangulation fraud is an advanced type of fraud that involves, as the name suggests, three
parties: the merchant, the fraudster, and a real customer, looking for specific goods or
services. The person committing the fraud creates a believable-looking merchant site
offering various products for low prices. After a customer purchases, the fraudster uses
credit card information to order the item from a legitimate seller's site. This type of
fraud targets the customer's credit card data and often goes completely unnoticed.
Nevertheless, if the customer notices the transaction from an uncertain source, there is a
high chance they will issue a chargeback operation, and the legitimate business will lose
revenue.
Criminal Fraud
A criminal fraud refund dispute is different from a friendly fraud chargeback. While clients
that issue friendly chargebacks try to cover their fraud with believable excuses, the
clients involved in criminal fraud shamelessly use stolen credit card information to
purchase online. Later, when a legitimate cardholder gets a notification about a
transaction, they demand the reversal of the financial operation. In a case like that, the
merchant must return the money to the cardholder despite this operation being a fraud,
meaning the seller loses revenue and gets charged penalty fees.
Subscription Fraud
This simple type of fraud occurs when the customer falsely claims they have canceled their
subscription but are still charged a regular fee for the service. As in friendly fraud,
clients who commit this fraud might insist that this issue occurred due to system errors on
the merchant's site, problems caused by unstable internet connection, etc., and issue a
chargeback. At the same time, they continue using the company's services for free.
Merchant Error
Despite a large amount of chargeback frauds, there are still legitimate refund operations
initiated due to the sellers' mistakes. While such chargebacks might initially seem
fraudulent, it's important to thoroughly analyze the case before jumping to conclusions.
Look for potential errors that happened due to one's inattentiveness or the site's
malfunctioning, such as double-billing, shipment to the wrong address, delivery of the wrong
item, etc. Maintaining a friendly attitude toward your clients is essential for good
customer-business relationships, crucial for gaining new purchasers and stimulating your
business' growth.
Remember that various fraud schemes require specific approaches when dealing with chargeback fraud. Thus, friendly fraud and triangular chargeback fraud require different protection measures. Analyze occurring chargebacks attentively and learn from past experiences to protect your business's income and reputation.
How to Prevent Chargeback Fraud
Chargebacks are a common issue for all businesses and protecting against them is important. But how to prevent chargeback fraud? Well, there are several efficient ways to minimize the risk of chargeback fraud and secure your revenue and the company's good name. Here, we share efficient tips on how to protect yourself from chargebacks by implementing different chargeback protection strategies.
Make Your Policies Clear
One of the common excuses clients use while committing friendly fraud is that they weren't
aware of the company's refund policies. A simple way to minimize friendly fraud is to state
your terms clearly. Create a separate page with the rules of your business described in an
easy-to-read way. Make sure the statements on this page are definite and can be understood
in only one way; this will also minimize the risk of misunderstandings between you and
reliable customers. Additionally, you can place a hyperlink to your terms and policies on
the checkout page. Also, you can add a checkbox button with an agreement to terms and
policies that will require clients to check your company's rules before proceeding with the
purchase. This way, you will be able to easily win friendly fraud chargeback cases where
clients break your policies.
Create a Black List
If you wonder how to avoid chargebacks, you should
know that fraudsters often repeat their crimes. To prevent chargeback frauds from recurring,
it is essential to create a black list of unreliable clients. Add customers who were
repeatedly noticed in chargeback frauds and other clients who disrupted your work (such as
individuals who harassed staff via direct messages, telephone pranksters, etc.). While this
strategy might seem harsh, it is a highly efficient and simple way to deal with chargeback
fraud and many other frustrating situations that saves your company time and money.
Implement Package Tracking Tools
Another common excuse for friendly fraud chargebacks is "the package wasn't delivered" or
"the item was shipped to the wrong address." By implementing package tracking instruments,
you can easily prove that you diligently provided services to the customer, successfully
winning the friendly fraud chargeback dispute. Additionally, these services can be helpful
in case of actual incidents: such tools will allow you to find the lost mail and refund the
clients who didn't receive their purchases, improving the customer's experience and
fostering trust between you and your clients.
Gather Proof of Your Competence
When chargeback disputes occur, the only way to protect your revenue is to convince the bank
of your competence. Gather evidence that can prove your reliability as a seller. This may
include transcriptions and screenshots of conversations with a client, the purchase
documentation, transaction records, etc. Another good way to appeal to the issuing bank is
to have a reputation of a trustworthy merchant. You can obtain it by letting your clients
comment on your services. Many positive reviews might convince the financial company of your
trustworthiness. This will help you easily solve friendly and criminal fraud chargeback
cases, efficiently securing your revenue.
Review Chargeback Data
Another good way to prevent chargebacks from reoccurrence is to monitor your chargeback
data. Keep chargeback transaction records and organize data on chargebacks in an
easy-to-read way. Analyze information on chargeback transactions, notice fraud trends,
typical chargeback schemes, unreliable customers with similar names, etc. Look for the weak
spots in your chargeback protection system and take measures to strengthen your chargeback
fraud defense. Additionally, look for other reasons for chargebacks. There is a high chance
that some of the chargebacks were not initiated by customers trying to commit fraud but
rather by clients dissatisfied with your company's work. Look through chargeback data to
find where your company might be lacking in customer service and fix the issue to prevent
not only chargeback fraud but also legitimate chargebacks.
Implement Chargeback Prevention Services
Dealing with transaction disputes yourself might be overwhelming. Chargeback fraud cases
demand much attention, meaning solving financial issues requires time and effort. In larger
companies, chargebacks occur daily; paying attention to hundreds of chargeback disputes
simultaneously is simply impossible. Fortunately, there's a way to prevent chargeback fraud
efficiently and quickly.
Chargeback fraud protection services offer various tools that can help you in this process. Partnership with chargeback fraud protection companies provides several benefits, including:
-
Reduced operational costs
Chargeback protection services effectively prevent friendly and criminal chargeback frauds, which secures your revenue and minimizes the amount of money spent on refund transactions. Moreover, avoiding chargeback fraud helps you escape chargeback fees from your payment processor.
-
Professional analysis
Chargeback fraud protection applications offer deep expertise of chargeback data that can later be used to detect weak spots in the fraud protection system and help companies define the effectiveness of implemented fraud prevention measures. -
Increased revenue
Chargeback prevention services efficiently reduce time spent on transaction disputes, allowing your team to take care of more important tasks and provide better customer service. These factors help merchants improve their reputation, attracting new clients, which results in an increase in revenue.
While providing online payment options can increase sales, merchants must also stay aware of the present threat of chargeback fraud and chargeback transaction penalties. While some fraud-protection strategies might seem tedious, every company must take necessary steps to prevent chargeback fraud and ensure chargeback fraud protection of their businesses.
How Germius Can Help
Dealing with chargebacks is always a tedious process requiring much attention. Fortunately, Germius provides excellent chargeback protection services that will help you deal with chargeback fraud.
Here, we present Verifi and Ethoca — two efficient chargeback fraud protection instruments that will handle chargebacks for you, allowing your team to dedicate time to more important tasks.
Verifi
Verifi offers excellent chargeback protection features, including:
-
Rapid Dispute Resolution (RDR)
This incredible feature allows merchants to quickly detect fraud cases and resolve financial disputes, preventing chargebacks from being issued. Moreover, it helps to differentiate frauds from legitimate refund requests, allowing you to address actual issues properly. -
CDRN alerts
Verifi's Cardholder Dispute Resolution Network (CDRN) real-time alerts efficiently notify companies about chargebacks before they are issued, helping merchants resolve disputes without additional financial losses. -
Order Insight
This feature efficiently enhances the transparency of the purchase, minimizing the risk of friendly fraud chargebacks and improving the overall customer experience. -
C.E.3.0
Compelling Evidence 3.0 helps merchants detect repeat offenders even after prolonged periods of time, effectively securing revenue.
This service is a reliable choice for businesses that prefer Visa transactions. Access it today with Germius CRM.
Ethoca
Ethoca effectively helps minimize financial losses thanks to such useful features as:
-
Ethoca Consumer Clarity
This feature allows clients to access simple and clear descriptions of purchases on cardholder statements, which minimizes the risk of friendly fraud chargebacks. -
Fraud Insights
This function allows merchants to access valuable data on declines, chargebacks, and credit card fraud trends, significantly strengthening the company's anti-fraud system. -
Real-Time Alerts
Real-time notifications help sellers quickly resolve fraud cases, minimize monetary losses, optimize the team's work, and stimulate better productivity.
This application is a trustworthy helper for companies that choose Mastercard. You can safeguard your business now by accessing it through Germius CRM.
Conclusion
Chargeback fraud is a common frustrating issue for many businesses, from new to experienced and large to small. However, there are effective strategies for fighting chargeback fraud. Implementing anti-fraud measures is vital for your business's stable development; analyze your chargeback data frequently, strengthen your weak spots, and invest in chargeback prevention services to ensure the security of your company's revenue and reputation.
