How to Spot Chargeback Fraud: What to Look for to Protect Your Business

Sydney VaccaroFraud PreventionLeave a Comment

How to Spot Chargeback Fraud_ What to Look for to Protect Your Business
Chargeback fraud is when a cardholder maliciously disputes a charge in an attempt to get their money back from the transaction, while still retaining the goods or services they received.

Chargeback fraud accounts for 35% of all fraud losses. As such, merchants need to take proactive measures to prevent and be prepared to respond to this type of fraud. In this post, we will go through what chargeback fraud is and how merchants can prevent and respond to it.

What is Chargeback Fraud?

Chargeback fraud is when a cardholder maliciously disputes a charge in an attempt to get their money back from the transaction, while still retaining the goods or services they received. This type of fraud will slip through front end fraud filters because it’s the actual cardholder making the purchase. The issue starts when the cardholder disputes the charge after they have received to product or service. Cardholders may claim a variety of reasons to dispute the charge.

For example, a couple goes on vacation and gets the flu on the plane. They are unable to do any of the activities they wanted because they were too sick to do so. When they get home, the couple disputes the charge for the hotel and plane tickets because their vacation was ruined.

A more malicious example of chargeback fraud is flip fraud. Flip fraud is when a customer purchases a product with the intention of disputing the charge, then selling the product on Craigslist or eBay for a profit.

How to Spot Chargeback Fraud

As we mentioned previously, chargeback fraud is the actual cardholder making the purchase. That means these fraudsters can easily make a purchase without being stopped or detected. So, how can merchants spot a chargeback fraudster?

Post Transaction Dispute

The easiest time to catch chargeback fraud is when they dispute a charge after the transaction. Unfortunately, this is not the best time to spot a fraudster because it means they have already disputed a charge. But it is still valuable to recognize chargeback fraud so you can ban the cardholder from your site. The chargeback fraudster's transaction will show that everything was correct with the purchase, but they will still claim there is a reason to dispute the charge.

Let's take the vacation example we talked about earlier. The transaction would show everything went as planned for the flight. The couple checked-in for the flight, they boarded, they purchased some beverages, and the flight landed and took off on time. All of this information works to disprove the cardholder’s claim that they did not receive the flight.

Merchants need to keep in mind that friendly fraudsters may have a similar situation, but friendly fraudsters have no malicious intent. The difference is if a friendly fraudster is able to remember or figure out what was purchased, they will not pursue a dispute. Cardholders that commit friendly fraudsters should not be banned.

Customer Service Records or Failed Return Attempts

When a customer reaches out to customer service to return an item or obtain a refund but is unable to do so because of the merchant’s policy, the cardholder may turn to the dispute process to get their money back. For example, a cardholder did not cancel their subscription in time to stop the next month of service. They contact the customer service representative, who tells the cardholder the merchant's policy. The customer then disputes the charge claiming that they canceled the subscription, and the merchant still charged them for it.

How to Stop and Respond to Chargeback Fraud

There are a couple of methods that merchants can put in place to prevent chargeback fraud and be prepared to respond when it does happen.

Flexible Return Policy

A flexible return policy that is clearly communicated to the customer can help avoid chargeback fraud. The customer has confidence that if the product doesn’t work out, that your business will work with them to find a solution. If the customer believes that you have a strict return policy or that you aren’t easy to work with, it could deter sales or have the cardholder turn to their issuing bank to help get their money back.

If it is not possible for your business to have a flexible return policy, then make sure to state your policy very clearly at the time of check out.

Cleary Explained Terms and Conditions

You can avoid disputes from frustrated customers by clearly communicating your terms and conditions at the point of sale. Anything that could cause the customer to seek a return or refund on the transaction should be communicated. This could include any additional fees that may apply, information regarding the timing of billing, limitations of the good or service, or any other details that need to be communicated before the sale occurs.

Collection of Evidence

The merchant must collect the necessary evidence to disprove a dispute throughout the transaction process, delivery, and any follow up through customer service. Each reason code requires specific evidence. If your company is not collecting this information, you’ll have inadequate dispute responses.

Stop Invalid Disputes

Traditionally, the only way to handle chargeback fraud was with a response to a dispute after it is filed. With Real-time Resolution (RTR), merchants can prevent an invalid dispute from ever being filed. RTR allows the merchant to communicate real-time customer, order, and product information to the issuing bank. The increased visibility into the situation surrounding the dispute gives the cardholder's financial institution enough information to prevent blatantly invalid disputes from being processed.

To learn more about Real-time Resolution and the possible ROI for your company, you can schedule a demo with one of our dispute experts.

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