How to Mitigate Chargeback Fraud

Every business that accepts payment by credit card knows the expense in both time and money that chargebacks can cause. Chargebacks can be initiated for a variety of reasons, of course, some of which are legitimate, or at least understandable. On the other hand, some are unreasonable, questionable, or outright fraudulent. It is necessary to take steps to reduce legitimate chargebacks, of course, but it is even more important to implement solid measures to mitigate chargeback fraud.

Chargebacks: Preventable But Inevitable

Strictly speaking, chargebacks are preventable, whether legitimate or fraudulent. If customers are never dissatisfied, or if they always contact the business directly to request a refund rather than contacting the bank to initiate a chargeback, chargebacks will not occur. However, customers will be dissatisfied at times, and will contact the bank rather than your business on many of those occasions. Although preventable, realistically speaking, chargebacks are inevitable.

It’s important to keep in mind that it is the occurrence of chargebacks, not the number, frequency, or financial impact of chargebacks that is inevitable. There are a variety of measures that can be implemented to reduce the likelihood of chargebacks. They can be made part of your policies, your customer service, or your transaction system and process. You can read about some of them here .

Chargeback Fraud

Considering the prevalence of credit card transactions, it should come as no surprise that there are various types of credit card fraud. Generally speaking, they fall into two categories. One can be considered to be “true” fraud and the other can be considered to be “friendly” fraud.

True fraud is intentional fraud . In the case of true chargeback fraud, the perpetrator makes a credit card purchase with the intention of initiating an illegitimate chargeback based on false claims. It is a conscious attempt to utilize the chargeback system to obtain personal gain that is not warranted.

Friendly fraud is often unintentional, or at least starts out that way. There are four types of friendly fraud, with varying levels of “friendliness.”

Accidental/unintentional

In these cases, there is no malicious intent involved and the cardholder simply makes an innocent mistake, such as forgetting about making the purchase or not recognizing a merchant name or ID on a billing statement.

Customer dissatisfaction

In these cases, a customer demands a refund not because there is an actual defect or deficiency with the products or services, but because he or she is somehow dissatisfied with them. In a sense, it’s a “got what I wanted, but it wasn’t what I wanted” type of situation. The nature of some products and services leaves more room for customer claims of not getting what they paid for. Businesses that promise things that are difficult to measure are particularly susceptible to this.

Family fraud

In these cases, the cardholder’s child, spouse, or other family member makes a purchase without the cardholder’s knowledge or permission. This frequently starts out as accidental/unintentional friendly fraud, but becomes intentional when the cardholder continues to claim that the purchase was illegitimate despite finding out that the purchase was made by a family member, etc. The cardholder is no longer simply making a mistake, but is committing the crime of chargeback fraud.

Malicious and intentional

In these cases, the only real difference from other types of true fraud is that the fraud is committed by the actual cardholder rather than an unauthorized third party. The cardholder makes the purchase with the intention of filing a false dispute or making false claims.

Chargeback Countermeasures: Deluxe Version

Although chargeback fraud involves some factors that are not issues in the case of legitimate chargebacks, there is, fortunately, quite a bit of overlap between the countermeasures. In a sense, measures to mitigate chargeback fraud are simply the expanded or “deluxe” version of standard chargeback countermeasures. In the case of chargeback fraud countermeasures, the emphasis is shifted somewhat away from making it easier for customers to get issues resolved and measures to reduce dissatisfaction to reducing or eliminating loopholes, ambiguity, and anonymity that provide opportunities for fraud to be successful.

Good customer service

Experienced customer service representatives will often be able to tell when something isn’t quite right with a dispute. Train your staff to ask customers questions about any problematic details. That is often enough to discourage fraudsters from carrying out their plans.

Good return policy

A clear and explicit returns/refund policy will significantly reduce the leeway for dishonest customers to claim ignorance or find loopholes. If a dispute ends up going to court, the existence of a clear and explicit policy could be the difference between winning and losing.

Clear communication

Clear, consistent, and appropriately timed communication can help deter chargebacks in general, and chargeback fraud, friendly or otherwise, in particular. Sending an order confirmation, a shipping notification, a follow-up message after delivery, or other simple acts are usually enough. The more interaction you have with fraudsters, the less able they will be to remain anonymous.

Tracking and confirmation of delivery

A method of committing chargeback fraud that is fairly common is to claim that a product was not delivered. You can prevent, or at least deter, this by using delivery tracking/confirmation. Even if it is not possible to get a customer’s signature for a delivery, many delivery companies photograph the package at the delivery point, typically from an angle that makes it possible to identify the location (e.g., angles that show the front door, the house number, etc.).

A High-risk Payment Processor Can Help

High-risk payment processors specialize in serving industries that have a high rate of fraud, so they have experience and knowledge that can be applied to your business’ specific situation. Zen Payments understands the payment processing needs and challenges of high-risk industries and can help you find ways to prevent/reduce your risk of chargeback fraud. That experience and expertise can help you not only to get you a merchant account, but also to reduce chargebacks, whether legitimate or fraudulent, so that you can keep that merchant account.

Be sure to ask as many questions as necessary until you’re satisfied with the responses and clear about what you can expect and what will be expected of you. Our team at Zen Payments would be happy to speak with you and find ways to help your business prosper, so please don’t hesitate to contact us .