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  • Writer's pictureMonica Eaton-Cardone

Fraudulent Chargebacks: How To Handle Them?

Protect Your Business from Fraudulent Chargebacks!

Fraudulent Chargeback

Consumers often assume that filing a chargeback is just another way of getting their money back; it's convenient and easy. However, by bringing the bank into the picture as a middleman, they can cause you a lot of headaches and damage, besides defrauding you. This is a practice known as “friendly fraud,” and contrary to its name, it’s anything but friendly.

Many shoppers who are disputing charges are unaware that they’re doing anything wrong. However, some are cognizant of their actions and knowingly abuse certain loopholes in the chargeback rules. They can file illegitimate chargebacks at the merchant’s expense and leverage the system to get something for free; a practice commonly known as “cyber shoplifting.”

Regardless of the customer’s intent, the result is the same: lost revenue, merchandise, shipping costs, and processing fees. You also have to contend with added chargeback fees and other long-term threats to your business. Thus, it’s important that you understand exactly what chargeback abuse is, and what can be done to prevent these types of chargebacks from happening in the first place.

Friendly vs True Fraud Chargebacks

The main difference between legitimate and fraudulent chargebacks is the identity of the suspect credit card user.

True criminal fraud occurs when a credit card is stolen and used without authorization by someone other than the cardholder. In contrast, friendly fraud is harder to pinpoint because the fraudster is the cardholder. A purchase will initially appear as legitimate, and you will have no idea that anything malicious happened until long after the purchase has been finalized.

Several of the most common reasons given for chargebacks include:

  • The item or service wasn’t delivered.

  • The item or service wasn’t as described (counterfeit, wrong size, defective, etc.).

  • The merchant didn’t cancel the customer’s recurring payment when requested.

  • The original transaction wasn’t authorized by the cardholder.

Any of these could be a valid claim by a customer, but with friendly fraud, the claim is untrue. To make matters worse, the customer may file a dispute weeks—or even months—after a transaction.

Here’s the bottom line: friendly fraud always spells bad news for you as a merchant. It will negatively impact your business, and there’s no way to effectively detect it before the transaction.

Exploring the Top Reasons Behind Disputes

Chargebacks were initially designed to protect consumers from unfair merchant practices and identity theft. However, the chargeback process is increasingly being misused.

We can trace the growing threat of friendly fraud to five main sources:

  1. Increased viability of online shopping: Compared to brick-and-mortar stores, online merchants are an easier target for friendly fraud. As we’ve seen with the ongoing pandemic, many people have chosen online shopping for its convenience and to avoid the risk of in-person shopping.

  2. Outdated chargeback regulations: Despite the eCommerce industry growing by leaps and bounds, the rules governing the whole process have mainly remained stagnant.

  3. Convenience: The internet has created another problem in that immediacy is the new normal. Cardholders feel it’s faster and easier to file a chargeback with the bank instead of working a refund out with the merchant.

  4. Banks exacerbate the problem: Even banks are feeling the strain of the rapid rise in overall chargebacks. Most banks simply don’t have the manpower to keep up with the steady demand to ensure every chargeback case is handled thoroughly.

  5. Limited merchant capacity: Although merchants have the right to challenge chargebacks, the dispute process is complicated and time-consuming. Even when a chargeback is filed fraudulently, the merchant will have a hard time validating the original transaction.

Best Ways to Reduce Chargebacks

The good news is that there are steps you can take to protect your business and recover lost revenue. For instance, you can employ multiple tools to eliminate criminal fraud, including:

  • CVV Verification: Card Verification Values codes (CVV2) cannot be stored by merchants. Since a code must be entered at the point of sale, it’s safe to assume that the physical card is in the consumer’s possession. Having the code appear on a receipt is also an effective way to dispute chargebacks that are a result of supposedly-unauthorized transactions.

  • 3-D Secure: 3-D Secure is a payment service providing an added layer of security for card-not-present sales. It uses a 3-step procedure to authenticate the cardholder, and shoppers must enter a predetermined passcode during the checkout process.

  • Address Verification Service: You can use address verification to easily reduce fraud. With a positive AVS match, you can contest a cardholder’s claim that the purchase wasn’t authorized.

In addition to these tools, you can prevent unnecessary chargebacks by providing exceptional customer service. A happy and satisfied customer will be less likely to file a chargeback and more likely to trust that you will take care of their needs. It’s also important to build relationships with customers and use effective means of communication. Thus, your return policy should be clearly displayed, and customers should always know how to get in touch with someone from the company to ask questions or resolve issues.

The more transaction-specific information you can collect, the better. An electronic signature page is an effective way to help customers understand what they are buying and the conditions to which they are agreeing. It also will provide essential documentation in the event of a future chargeback.

Finally, every transaction should be immediately followed up by a confirmation email that includes a tracking number and any important order information.

Take Action Now

Friendly fraud should not be underestimated or written-off as a “cost of doing business.” The unfortunate reality is that merchants are losing far more revenue to friendly fraud than they are to criminal fraud, but it doesn’t have to be this way.

eCommerce continues to grow, and fraud techniques are growing along with it. If you don’t take the necessary steps to create a comprehensive, multi-faceted defense, you could face costly consequences for your business’s long-term sustainability.


Disclaimer: Any and all information is not intended to be, nor is it, legal advice. Please consult your attorney for information concerning allowable rates of interest.

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