Chargeback fraud occurs when a customer disputes the transaction through their credit card or financial institution even though they received the good or service. Chargebacks can occur for a variety of legitimate reasons, such as a lost or damaged product. However, in recent years, customers have started exploiting chargebacks and using this form of payment protection to exploit companies and conduct fraudulent activities.
Chargebacks can result in lost revenue, depleted resources, high fees, a tarnished reputation, and lost access to selling platforms. In some extreme cases, businesses lose the ability to work with payment providers to process transactions. These factors can seriously hinder your ability to operate your company, making it important to understand how you can take a proactive approach to chargeback fraud prevention.
There are a few different types of deliberate chargeback fraud that your business might encounter. Let’s go through the main types of chargeback fraud.
Friendly fraud chargebacks occur when a customer makes a legitimate purchase but later disputes the transaction with their provider. This form of chargeback abuse can occur when a customer forgets they made a purchase or doesn’t recognize your company’s name on their bill and thinks it’s fraud. Friendly fraud can also happen when a customer receives the merchandise but claims they never received the good.
Return fraud occurs when a customer returns an item to a retailer and submits a chargeback dispute, saying that the product was defective even though the product works perfectly fine. The customer’s financial provider might initiate the chargeback dispute process even if the product isn’t eligible for return.
Digital good chargebacks happen when a customer starts the chargeback process for a digital good, like a downloadable template or online course, after using the product. For example, a customer downloads a budget template, then files a chargeback to get their money back even though they still have access to the product.
This type of chargeback fraud involves a customer submitting a chargeback request for a subscription service after using the service for several months. The customer claims they did not authorize the purchase and requests a refund for past billings.
Chargeback fraud comes with more side effects than just lost revenue. In fact, consistent chargebacks can seriously harm your cash flow, especially if margins are already tight. Here are some other ways chargebacks can impact your business:
Like most fraud, chargeback fraud comes with financial losses. For one, your business loses out on revenue already earned. In addition, you could be out the funds to produce the product or service, like raw materials or labor. Moreover, each chargeback generally comes with a fee. Constant chargebacks impact your margins and ability to continue operating.
Customers who do not get their chargebacks approved could take to social media to damage your reputation, even if the chargeback was fraud. This can lead customers to perceive your business as untrustworthy, affecting sales and brand loyalty.
Dealing with chargebacks is time-intensive and expensive. You might need to spend a significant amount of time researching the chargeback request and putting together proof. This can take away resources from other key areas of your business, like customer service, launching new products, and retaining existing customers.
Certain platforms and payment providers monitor your chargeback ratios. If you have frequent chargebacks, you could increase your ratio, which subjects you to additional fees and the loss of merchant accounts. These factors can be detrimental to your bottom line and operational ability.
All businesses, regardless of industry or size, are at risk for chargeback fraud. However, there are a few businesses that have a heightened risk, including:
Businesses in these industries are at a higher risk of chargeback fraud. Nevertheless, all businesses need the proper chargeback fraud prevention processes in place to avoid unnecessary refunds and chargeback claims.
Although not all chargeback fraud is preventable, there are strategies you can deploy to reduce your risk of fraudulent claims. Let’s go through some of these options in more detail.
Improving your customer service function reduces the number of chargebacks related to poor products and services. For example, if a customer receives a faulty product and your company doesn’t respond to calls or emails, they might have no choice but to file a chargeback claim. The solution to this issue might be as simple as providing a replacement part instead of losing money on the entire sale.
If your business has no defined return and refund policies, customers can take advantage of your leniency and file chargeback claims. With no policies to combat the chargeback request, your business might be out the money. When reworking your return and refund policies, simplicity is key. Don’t overcomplicate your policies and confuse your customers. Set straightforward and clear policies.
Having a chargeback system in place can expedite your chargeback response time and thwart fraudulent transactions before they incur. For example, if a customer has made a chargeback request before, all future orders will automatically be declined. This saves your business from a costly chargeback fee and deters criminal fraud.
Every time your business receives a chargeback request, you need to understand the situation right away. Failure to respond to the chargeback can result in funds automatically deducted from your company, even if the chargeback was illegitimate. Your team needs to analyze the chargeback, find proof to support your stance, and dispute fraudulent requests.
Documentation goes a long way when fighting a chargeback claim. One way you can generate documentation is to use tracked shipping labels. Priority tracking does cost more money, but it provides proof that the good was delivered to the customer’s address. In many cases, the delivery carrier will also take a picture of the package at the final destination. This allows you to immediately shut down the fraudulent claim.
Additionally, if your business is an online retailer, have a two-step authentication at checkout. This helps reduce the risk of a customer claiming the purchase was unauthorized. When they are required to verify the transaction with a phone number or email address, they have less leverage.
Summary
Your business can prevent fraud by improving your customer service function, tightening refund and return policies, investing in chargeback software, actively managing chargebacks, and retaining proof of
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