What Is Chargeback Fraud and How to Prevent It


Chargeback fraud negatively impacts businesses of all types and sizes, resulting in billions of dollars in lost revenue annually. Unfortunately, with the growth of eCommerce, chargeback fraud has been increasing, and this is expected to continue.


However, there are several things that businesses can do to protect themselves from chargeback fraud. Detecting, countering, and mitigating the risk of fraud starts with understanding what it is and how it works.


In addition to providing an overview of chargeback fraud, this article highlights several red flags, as well as tips on how businesses can prevent it.




What Is a Chargeback?

A chargeback is a payment that is returned to a customer after the customer has successfully disputed an unfamiliar charge found on their bank account or credit card statement. In other words, a chargeback is the amount of money that is returned to a customer’s debit or credit card after the customer has denied making the transaction in question.


Chargebacks can result from either legitimate or illegitimate claims. Legitimate chargeback claims are made by customers who have fallen victim to a fraud attack, noticed an unfamiliar charge on their credit card, and contacted their credit card company to receive the money back.


Chargebacks that are the result of illegitimate claims occur when a customer does in fact make a purchase, but subsequently files for a chargeback, fraudulently claiming they didn’t place the order or receive the goods.




Chargeback vs Refunds

Although a chargeback is like a refund in that funds are returned to the customer, there are several differences. One of the main differences is that a chargeback enables the customer to get their money back directly from the bank or credit card company thereby bypassing the merchant. Therefore, rather than the customer, it is the bank that then deals with the merchant to get the funds returned.


Chargebacks are also more time-consuming than refunds, as well as more costly, and do not result in a return of goods to the merchant. In fact, chargebacks pose greater reputational harm to merchants than refunds because merchants with persistently high chargeback ratios (the number of a business’s chargebacks compared to its sales volume) risk regulatory involvement until the ratios are reduced and may even face financial penalties if they fail to get their chargeback ratios below certain thresholds.




What is Chargeback Fraud?

Chargeback fraud is the result of illegitimate chargeback claims or abuse of the chargeback process. It is a type of consumer fraud whereby a consumer fraudulently attempts to obtain a refund, after receiving the goods or services, through their bank or credit card issuer, rather than through the merchant. This fraud frequently involves online purchases made with credit cards.


Chargeback fraud is a form of fraud because the customer is intentionally being deceptive, either about not authorizing a payment or about not receiving a product or service.


In some cases, customers may have forgotten that they made a purchase, or a family member made a purchase without the cardholder’s knowledge. When done intentionally, however, chargeback fraud is illegal.




The Consequences

Chargeback fraud can have significant negative consequences on businesses and the process of contesting it can be lengthy and expensive.


Although a merchant may contest a chargeback when it suspects that there has been abuse or fraud, many merchants will forgo the process and simply pay out the chargeback because of the time and cost involved in contesting it.


In most cases, the bank sides with the customer, refunds the charge, then processes a chargeback against the merchant, who bears the financial impact of repaying the funds in addition to fees from the issuing bank.


Although chargeback fraud affects businesses of all sizes, small and mid-sized businesses often bear the greatest financial hit. However, larger businesses face an increased possibility of larger-scale chargeback fraud.


Other than financial losses to businesses, negative impacts also include operational costs, damage to reputation, increased costs of fraud prevention, and penalties from payment processors or credit card issuers. High instances of chargeback fraud can also lead to higher processing fees and even the loss of merchant accounts.




Which Businesses Are Most at Risk?

Any business that accepts and processes credit card transactions can fall victim to chargeback fraud, regardless of size or industry.


Some businesses that are especially vulnerable to chargeback fraud include the following:


  • Online retailers and service providers
  • Subscription-based businesses
  • Businesses selling high-value products and/or services




Red Flags of Chargeback Fraud

The best way to mitigate fraud is to familiarize yourself with some of the most common warning signs of fraudulent activity. Although the presence of red flags doesn’t necessarily indicate a problem, it is important to recognize scenarios that warrant further review.


The following red flags have been identified by experts as potential indicators of chargeback fraud:


  • Repetitive orders
  • Larger than expected orders or orders of big-ticket items
  • Different cards with the same shipping address
  • Same account with a different shipping address
  • Multiple cards used for a single order
  • Reattempting the order with a smaller amount
  • Incorrect card expiration date
  • Problems providing personal information
  • Spelling errors, typos, using all-caps
  • Disinterest in shipping costs
  • International shipping




How To Prevent Chargeback Fraud

Chargeback fraud is exceedingly difficult to prevent, and targeting chargeback fraud before it happens may be even harder. This is because most frauds, such as account takeover fraud and payment fraud, among others, occur either before or during the point of purchase. Chargeback fraud, on the other hand, occurs post-purchase, and in some cases, may not happen until several months after the purchase has been completed.


Nonetheless, there are measures that businesses can take to combat chargeback fraud. These include:


  • Training staff on the chargeback process and associated red flags of chargeback fraud
  • Improving customer service and establishing clear customer communications to prevent ambiguities
  • Providing clear return and refund policies that are easily accessible to customers
  • Ensuring solid purchase and return processes so that chargebacks don’t happen in the first place
  • Implementing a robust and consistent process to effectively manage chargebacks
  • Utilizing fraud detection and prevention tools
    • For example, Alessa’s robust fraud management solutions use advanced analytics to analyze transaction data and flag suspicious activity.





Although the chargeback process is in place to protect consumers against fraud, this process can also be abused, and often quite easily. It can be incredibly costly to businesses and is currently on the rise due to the increase of digital payments. Although this is often a difficult fraud to prevent, businesses can protect themselves by ensuring they have the right tools and measures in place.


To learn how Alessa can help your business secure itself against fraudulent activity, contact us today.

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