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How to Survive Chargeback Fraud – How to Keep Your Company Safe

Oh, chargebacks. Chargebacks can be a chokehold on the profits and bottom lines of merchants. It has been a challenging year for small businesses. They have had to close their doors due to Covid-19 and struggle to secure Government loans to keep them afloat. Credit card fraud is another cash drain. Chargeback fraud is a common and severe problem. Also known as “friendly fraud,” it affects all businesses that sell online. What is the reason? Why? Chargebacks can not only damage your credit card processing company’s reputation but can also impact your business bottom line. Let’s get to the point. What is a chargeback?


What are chargebacks?

When a customer disputes the charge on their credit cards, a chargeback is what they call it. The merchant can reverse the transaction, and the customer will get their money back if there is a dispute. Chargebacks are a good thing for cardholders because they reduce the risk of having to reverse funds.


How credit card chargebacks can hurt your business

Even if there was no fraud, a customer might request a chargeback. A customer may request a chargeback if they aren’t satisfied with your product or service or because they believe it was incorrectly described. If they don’t recognize the charge, they can request chargebacks.

You, as a business owner, must take responsibility for chargebacks. What is the reason? Why?

If you charge too much and your chargeback ratio (total charges divided by total sales) is high, your merchant account will be closed. You’ll also be charged higher processing fees. If you lose your merchant account, you will need to find another processor that accepts high-risk merchants.


What is the reason for chargebacks?

Chargebacks can be caused by a variety of reasons, including fraudulent transactions and defective goods. Understanding why customers might initiate chargebacks against your business is a first step to reducing or eliminating them.

American Express, Discover, and Visa are major card networks that create reason codes. These codes provide an alphanumeric string with text explaining why a particular chargeback occurred. Also, they tell businesses what documentation is required to contest the dispute.


Chargeback fraud

Friendly fraud, or chargeback fraud, is on the rise. Fraud is not something that’s “friendly.” Customers can make mistakes and file chargebacks inadvertently, but that’s an exception, not the norm.

Friendly fraud was created to help customers who have filed for chargebacks due to confusion or theft. Businesses may find it challenging to defend themselves because the system favors cardholders. Customers claim:

  • The description of the product is incorrect
  • They didn’t receive the order
  • The order was canceled, but the shipment was still sent.
  • A family member made the order without the consent of the other.
  • Poor customer service

Sometimes poor customer service can cause a dispute. Customers who have received poor customer service, had their emails ignored, or waited for too long on hold can start payment disputes.


Fulfillment questions

Fulfillments that include shipping, packing, and delivery may result in product damage, late deliveries, or non-delivery. It can lead to chargebacks.


Actual fraud

A fraudster can purchase from you using stolen information and have the item shipped to them. The legitimate cardholder then files for a chargeback and identifies that the purchase was fraudulent.

You must implement the necessary fraud protection measures to ensure your battle strategy against friendly fraud. It is also essential to have easy and efficient access to all transaction data to help you debunk any unscrupulous customers’ fraudulent tactics.


How to avoid credit card chargebacks

You will not be able to return the merchandise or services you have received. Some chargeback claims may result in you paying more for the transaction than the actual value due to the processing fees charged by financial institutions. It would help if you were vigilant about protecting yourself. It would help if you did the same thing for your online business as brick-and-mortar businesses to prevent theft. These are the steps you need to follow:


1. A simple-to-understand policy for refunds

You can avoid chargebacks by displaying your refund policy on your website. Register and then print out the details on each receipt. Be as precise as possible and clearly state the return policy, exclusions, and restocking fees.

2. Create explicit billing descriptors

It may seem simple, but having a clear merchant description (a line that identifies your company name on the cardholder’s statement), date, and the transaction amount will prevent disputes


3. Keep shipping expectations well-defined

Many customers now expect lightning-fast shipping, mainly due to Amazon’s effect. You must be clear about your shipping times. After every purchase, please provide a copy of the shipping policy and place it on your website.


4. Customers issues should be addressed immediately

Don’t leave customer calls or emails unattended. There is nothing more frustrating than trying and receiving no response to a complaint. Automate email and phone systems so customers know when they can expect a callback.


5. Implement a multi-layered fraud prevention strategy

When it comes to fraud, technology comes in to help. Both the customer and the business become victims in this scenario, but your business ends up paying the price. It is best to stop the situation as soon as possible and capture the transactions before they happen. Here are some options:


Address verification service (AVS).

It helps reduce risk by comparing the billing address in a transaction with the address of the issuing bank. If the addresses don’t match, fraud is possible. Before a transaction is approved, always request that customers supply their billing and shipping addresses. Then wait for the AVS to verify.


BIN database

Merchants need to keep their chargeback ratio low. It will help you build your reputation. BIN checks provide extra security that makes transactions more secure for customers. A BIN database uses the first six digits from the 16-digit card number to verify every card’s legitimacy, credit, debit, charge, gift card, or otherwise. A thorough bank BIN search can be used to verify the authenticity of any questionable orders. It includes orders that are sent to different regions than the one issued by the card. You can review the transaction and take the necessary steps to protect yourself and your customer against fraud.


IP intelligence

Through an in-depth analysis, you can block suspicious transactions coming from fraudulent IP addresses. It allows you to monitor the risks associated with these addresses.

Verification code for credit card

Buyers should be required to enter their CVV number when they check out with your payment gateway. Merchants or payment processors cannot store the CVV number. Customers must have physical possession of the card used to make the purchase.


Verified by Visa or Mastercard Secure Code

Both tools require customers to enter a password before they can complete their checkout process. This tool is only available to e-commerce companies. However, it can protect your business against chargeback fraud.


Get ready for chargebacks in your business

While dealing with fraud and chargebacks can be time-consuming and daunting, businesses that don’t take the necessary steps to resolve disputes and keep chargeback rates low could suffer severe cash flow and financial losses. Retrieval requests and chargebacks must be handled quickly. Take action now to protect yourself!

Disclaimer. The opinions and views expressed in this article are the authors Andrew Napolitano.

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