In Part 1, we looked at some issues related to credit card fraud, as well as “friendly fraud,” one of the three main types of credit card fraud. In Part 2, we will discuss the two other types: chargeback fraud and true fraud.
Chargeback fraud is kind of like a less friendly version of friendly fraud. While the “fraud” in friendly fraud is unintentional, chargeback fraud involves a cardholder knowingly and deliberately disputing a charge and demanding a refund despite knowing that he or she did in fact approve the purchase and actually received the relevant goods and/or services.
There are a variety of reasons that people commit chargeback fraud, the most common of which is “buyer’s remorse,” missing the deadline for returns and simply wanting to avoid paying the bill.
Because chargeback fraud and friendly fraud have a similar pattern, with the former being intentional while the latter is generally unintentional, the things that you can do to prevent them are also the same in some ways. You should consider implementing the following.
If your customer service staff is skilled and experienced, they will more often than not be able to tell when something isn’t quite right with a dispute. Politely and professionally questioning the customer about the problematic details alone could discourage the person from continuing with the scam. At the very least, a customer service team that can be politely skeptical when necessary could give you the ability to start investigating as early as possible. The time and effort spent training the team well is likely to provide a variety of benefits, including saving you money and preventing bothersome legal action.
Sometimes cardholders don’t understand the deadline for returns or simply forget about it, but still attempt to get a refund by initiating a chargeback. This differs from asking for an exception to be made. Chargeback fraud involves a deliberate attempt to deceive the merchant, etc. Having a clear, easy-to-understand return/refund policy will help you in two ways. First, honest customers will be less likely to forget about a return deadline. Second, it makes it harder for dishonest customers to get around the policy. Be sure to include enough flexibility that legitimate extenuating circumstances can be taken into consideration. That willingness to listen to the customer and go a little above and beyond to help her often results in a higher degree of customer loyalty and more word-of-mouth advertising for your business.
As is the case with friendly fraud, consistent and clear communication that isn’t so frequent that it becomes annoying will do much to deter chargeback fraud. The frequent contact itself often discourages scammers from continuing their attempts, but it also gives you more leverage against specious disputes. Similar to friendly fraud, this contact can be as simple as sending an order confirmation, a shipping notification, and a follow-up message after the customer has received the items. E-mail communication can include easily seen links to your return/refund policy. Regular reminders for recurring payments and reasonably hassle-free ways to cancel orders can also be helpful.
One of the most common approaches taken by scammers attempting to defraud a merchant is simply to claim that the product was never received. This is where delivery tracking and confirmation can make a huge difference. The technology for tracking and confirmation continues to evolve, and its accuracy is improving. It may not be possible to get a signature in every case, but many delivery companies now photograph the package at the delivery point, often using an angle from which the location can be identified (e.g., showing the front door of the house). If you have solid evidence that the product was delivered correctly, chances are that the fraudster will back off.
The most malicious and ill-intended type of credit card fraud is referred to as “true fraud.” True fraud involves the use of a lost or stolen credit card to make a purchase that was not authorized by the cardholder. One way this differs from the other types of credit card fraud is that it is not the cardholder committing the fraud, but instead a third party. The cardholder files a dispute and initiates a chargeback because he or she did not actually make the purchase or authorize the use of the card.
In addition to lost or stolen cards, the fraudster may use counterfeit cards, often with a duplicated magnetic strip. Using the credit card information (account number, PIN, card verification codes, etc.) without actually having the physical card (a card-not-present transaction) also falls under this category in certain aspects. A fake card is sometimes used. A fake card differs from a counterfeit card in that, while the counterfeit card is created to actually function as a credit card, a fake (or disabled) card can be used to get the merchant to enter the information manually. This may create enough of a delay in the transaction being denied that the fraudster will be gone, merchandise in hand.
The loss and damage from true fraud can be enormous, particularly if it is combined with chargeback fraud. In such cases, the merchant loses the price of the merchandise twice, once when it is fraudulently acquired to begin with, then again when a fraudulent chargeback is initiated. Be sure that you and all of your employees understand the seriousness of the risk and consistently implement measures to combat credit card fraud. The following are some of the common ways to prevent or discourage true fraud.
Some fake or doctored credit cards are very skillfully and accurately created, making it difficult to tell the difference between them and real cards. If you have a basic policy of not entering card information manually, you can eliminate this risk completely. Naturally, you are still able to make exceptions for customers that you know and trust.
Using a chip reader takes away the ability of fraudsters to create counterfeit cards by tampering with the magnetic strip. The security functions of the chips continue to be improved, and their usefulness against fraud is expected to increase.
Another area of technology that continues to advance is technology to enhance the security of online transactions. A payment process that does not require the physical card to be present can be highly vulnerable to various types of fraud and tampering. Fortunately, technology is now available to do things such as denying fraudulent transactions before they are processed. It is anticipated that this technology will continue to be improved as well.
One of the measures that could be seen as a subset of the above is the use of security codes for card-not-present transactions, whether online, over the telephone, or on a mobile app. Requiring a security code is one way to confirm that the individual making the purchase is in possession of the card. There are still ways to get around this, of course, but like the other technological measures against fraud, improvements are expected to continue.
Although there is a growing pool of effective technology that you can (and should) use to protect your business from credit card fraud, the best way to protect yourself is to pay attention and do your due diligence. As has been mentioned, one of the reasons that businesses may be given the label “high-risk business” is the higher frequency of fraud in the industry. It can, of course, be a factor in having your request to open a merchant account denied by a bank. A record of being the victim of fraud can also result in the bank terminating your payment processing agreement and canceling your account.
For those and other reasons, operators of high-risk businesses need to give particular care and be diligent in their measures against credit card fraud. If you are using a high-risk payment processor, talk to them about things you can do to prevent fraud, and how their measures and your company’s measures against fraud can be used together to give you the best protection possible.