Chargeback prevention is a necessary part of doing business if merchants want to retain hard-earned revenue and keep a low dispute ratio. There are four methods of chargeback protection. When used together, merchants are able to have the lowest possible dispute rate.
#1 Chargeback Protection for True Fraud
The only way for merchants to stop true fraud is by putting preventive measures in place that block a fraudulent transaction from being accepted. True fraud is when a fraudster obtains credit card credentials and successfully makes a purchase on the merchant's site. Because the merchant is liable for the prevention of fraudulent purchases, the merchant receives an unwinnable dispute, a dispute fee, and possible losses merchandise. There are a couple of different ways merchants can assess if a transaction is fraudulent, which includes front end fraud filters, fraud scoring, and manual review.
What is a Fraud Filter?
Fraud filters help merchants assess if a purchase is fraudulent by filtering valid or bad transactions based on predetermined factors. Fraud filters are customizable and should be based on the merchant's industry, customer behavior, and other factors. There can be many filters layered on top of each other and in a specific order.
A filter can trigger a couple of actions to happen, depending on how the merchant sets it up. A filter can instantly reject the purchase from happening, send it into a manual review, accept the purchase, or it may just send it to the next layer of filters.
When set up correctly, fraud filters can be extremely helpful in preventing true fraud disputes while still letting legitimate customers in. When set up incorrectly, it can cost merchants in fraud and loss of sales.
What is a Fraud Score?
A fraud score is produced when a fraud platform performs a risk analysis on incoming transactions. The rating is based on predictive technology that can identify patterns of fraudulent activity. The higher the fraud score, the higher the likelihood of that transaction being fraudulent. To get this score, the programmed logic evaluates individual components of the transaction and compares the data to previously identified high-risk attributes. The different data elements that the score is based on can include:
- IP address
- Email address
- AVS results
- Shipping and billing address match
A fraud score can be one of the filters in a merchant's fraud filtering process.
What is a Manual Review?
When fraud filters are set up, they should be able to automatically accept the clearly valid customers and automatically decline the clearly fraudulent ones. Manual review is for the transactions that need to have a human look at and determine the validity of the purchase. A manual reviewer could be an internal employee or outsourced service. When the manual reviewer goes over the order, they will use tools and logic to try and determine the validity of the purchase.
Now that we have true fraud covered, let's move on to how merchants prevent friendly fraud and chargeback fraud disputes.
#2 Chargeback Protection for Friendly Fraud and Chargeback Fraud
Chargeback fraud is when a cardholder maliciously disputes a purchase in an attempt to get their money back while still retaining the goods or services. Friendly fraud is when a cardholder mistakenly disputes a charge because of an unclear merchant descriptor, simple forgetfulness, or a family member making unknown purchases. Chargeback fraud and friendly fraud differ from true fraud because front end fraud filters are not able to prevent these fraudsters from making purchases. Friendly and chargeback fraudsters are your actual customers, so there will be no red flags until after the transaction takes place.
Before Real-time Resolution (RTR), the only way merchants could handle chargeback and friendly fraud would be to respond to the dispute with a chargeback response. Now, RTR enables merchants to communicate in real-time with the cardholder’s issuing bank. By delivering customer, order, and product details to the issuing bank and customer before the dispute is filed, RTR can prevent both friendly fraud and chargeback fraud.
Friendly fraudsters can recognize their transactions and then not dispute their authorized purchase. Chargeback fraudsters are stopped by equipping the issuing bank's dispute analysts with enough information to make informed decisions on whether or not a dispute should be filed.
#3 Chargeback Protection from Valid Disputes
If a merchant receives a valid dispute, it means that the merchant made a mistake, and the customer is submitting a legitimate dispute. A merchant's operations, logistics, billing, or communication may be the root of the valid dispute. To make sure that necessary adjustments are being made, merchants need to be analyzing the disputes and associated reasons codes they receive. Merchants should be asking the following questions:
What Reason Codes are we Receiving?
If a merchant receives a large amount or a spike in a specific reason code, it points merchants in the exact place where a problem is happening. For example, if a merchant receives a large number of Visa Reason Code 13.2 Cancelled Recurring Transaction, this could mean there is a miscommunication happening between where the customer is canceling their subscription and updating the billing process.
What Dispute are we Losing?
If a merchant loses a dispute, it can mean true fraud, a valid dispute, or a problem with the dispute response process. Merchants are able to use what types of dispute they are losing to track down issues.
What Dispute are we Winning?
Winning a dispute means one thing: that the cardholder filed an invalid dispute. This indicates that the dispute is the result of a cardholder committing either chargeback fraud or friendly fraud.
By asking these questions and thoroughly going through your dispute data allows you to fix problems and prevent disputes.
#4 Chargeback Prevention Through Operations
Similar to the method of preventing valid disputes through dispute analysis, merchants can also take preventive measures to prevent chargeback fraud and friendly fraud disputes by modifying and improving their operations. For example, a merchant may not be reminding their customers about their upcoming subscription billing. As a result, friendly fraudsters see the charge and can't think of what they purchase. They dispute the charge thinking it is fraudulent.
On the other hand, chargeback fraudsters that were meaning to cancel their subscription, see the charge and, instead of dealing with their mistakes, dispute the transaction in an attempt to get their money back. To prevent this situation from ever happening, this subscription merchant could send out a reminder email about the upcoming charge. By doing so, it gives customers a gentle reminder of the transaction and gives them time to cancel their subscription if needed.
By performing a dispute analysis, merchants are able to pinpoint issues in their operations and take action to prevent disputes.
Is Full Chargeback Protection Possible?
Is there a way to reach 100% protection from disputes? Unfortunately, there is currently no way to achieve 100% protection. Still, merchants can significantly cut down on dispute volume by implementing chargeback prevention methods to stop true fraud, friendly fraud, chargeback fraud, and valid disputes.