Chargeback fraud is when a credit card holder refuses to pay for an eCommerce purchase made with their card, either because it was used without their permission or because they want to avoid paying for something they purchased, forcing the merchant to return the money for the transaction.
This article is a quick guide to chargeback fraud that answers these questions:
- Why does chargeback fraud happen?
- Why do merchants have to return the money for chargebacks?
- Can you dispute chargeback fraud?
- How can chargeback fraud be prevented?
Why Does Chargeback Fraud Happen?
Chargeback fraud happens for two reasons.
The first is the practice of using stolen credit card details (often purchased on the dark web) to make unauthorized purchases from eCommerce stores. When legitimate card holders become aware of the theft, they instruct their card’s issuing bank to cancel payment. Because merchants are often only notified of these cancellations weeks after they occur, their merchandise is already shipped and they incur the financial loss of the crime.
The second is when the authorized card holder makes a purchase and then decides to file a chargeback to avoid paying for it. Because this type of attack seems like a legitimate purchase when it is reviewed by merchants, it is commonly referred to as “friendly fraud“.
Why do Merchants Pay for Chargeback Fraud?
Chargeback fraud is unfair to merchants. Even though they authorized a purchase that seemed legitimate, and kept up their end of the bargain by sending the merchandise, they are required to return the money for the bank.
Merchants have to return the money for chargeback fraud because of the relationship between the financial incentives of the merchant, the bank, the legitimate card holder, and the fraudster. The financial incentives that exist between them is why merchants end up paying despite being completely blameless.
So, if it feels like no one is looking out for the interests of merchants in this process, it’s because no one is. And the reason is a simple one: The bank has no financial incentive to do so. Banks prioritize their card holders for three reasons:
First, because they aren’t going to pay for the fraud themselves. To protect their profits, they created a mechanism to off-board the risk of fraud onto another party in the transaction.
Second, because passing the cost of fraud onto card holders would also have an equally negative impact on their business model. Competition could arise between issuers for who would cover the most fraud, depressing profits. Industry-wide collusion to not cover fraud at all — shifting the risk to card holders — would depress demand for cards due to fears of losing tons of money to fraud.
Third, because the realities of online selling forces merchants to accept the risk if it is shifted to them. It’s all but impossible to run a profitable online business if you can’t accept credit cards. Banks know this, and understand that given the choice between paying a percentage of eCommerce profits back due to fraud, and not selling online at all, the vast majority of merchants will choose to take the hit because they make more money selling online than not.
In sum, between card holders and merchants (the bank is clearly not going to pay), it’s the merchants that have a financial incentive to continue using the banks’ services despite the cost of fraud. So the banks push it onto them.
Can You Dispute Chargeback Fraud?
Yes. To dispute chargeback fraud you refile the request to charge the card, and provide proof that the charge is legitimate. This process is called chargeback representement. To successfully dispute a chargeback, you must provide compelling evidence to support your claim. This includes AVS codes, the terms and conditions of the sale, and proof you have already tried to contact the card holder about the issue. To make sure you send the most relevant information and respond within the required time-frame, you should always check the chargeback code before filing a representment claim.
How Can Chargeback Fraud Be Prevented?
There are several ways chargeback fraud can be prevented:
Use an eCommerce fraud prevention platform.
Use an eCommerce fraud prevention company that uses algorithmic technology to look for data-based patterns indicating chargeback fraud. These platforms instantly approve low-risk orders, decline high-risk ones, and automatically reroute edge cases to manual review.
Hire human fraud analysts.
Although today’s technology is powerful, human fraud analysts remain important. Trained human professionals can make a decision about edge case orders, look for new fraudster attack patterns, and review the data generated by fraud prevention technology.
Keep thorough records of all transactions.
The more information you can provide in a chargeback representment claim, the more likely you are to prove the charge was legitimate and get the chargeback reversed.
Prepare for high volume periods.
Fraudsters attack during periods of high volume, when they expect merchants to be overwhelmed. Plan in advance for these periods by reviewing policies, ensuring technology is tuned to your risk level, and preparing human fraud analysts to handle the volume.
Review “friendly fraud” decline signals.
Merchants don’t think of returns as fraud. In fact, fraudsters often return false goods. Set systems to flag not just chargebacks, but also accounts that have a history of multiple returns.
To learn more about how to prevent chargeback fraud, check out our extensive list of chargeback prevention resources that covers every angle of the problem.
