Chargeback fraud, often referred to as friendly fraud, is an increasingly common challenge faced by business owners today. The term refers to a situation where a merchant is forced to refund a transaction due to a disingenuous customer dispute.
Chargebacks often occur accidentally, for example when customers forget a payment they made or when they don’t recognize the merchant’s name on their credit card statement. However, chargeback fraud is committed with intent, and in recent years, it has become the most common type of fraud businesses have to deal with.
In this guide, I’ll walk you through the basics of chargeback fraud, and tell you what you can do to help protect your business from it.
What Is a Chargeback?
A chargeback is when a cardholder disputes a debit or credit card charge they believe was made illegitimately using their card. When a cardholder initiates a chargeback, the transaction is typically reversed by their card issuer, and they are reimbursed for the allegedly fraudulent payment.
Thanks to the Fair Credit Billing Act of 1974, cardholders enjoy quick reversals of illegitimate transactions. However, this causes some challenges to business owners who have transactions reversed unexpectedly as a result of chargebacks.
What Is Chargeback Fraud?
Chargeback fraud happens when a customer knowingly disputes a legitimate payment through their card issuer or payment processor.
Typically, cardholders claim that they never received the item, that it’s faulty or incomplete, or that they never placed the order. By doing this, they’re able to get a refund on their purchase while keeping the product or service they received.
What Can You Do to Reduce Chargeback Fraud
Here are three steps you can take to help limit chargeback fraud:
1. Obtain Proof of Customer Participation
If you create strong evidence that customers did indeed participate in the transaction or receive the goods they purchased from you, you can confidently dispute fraudulent chargebacks.
Here are some ways to collect compelling evidence of customer participation:
- Use a shipment tracking system or signed shipments to help you prove that your customers receive their items.
- Log your customers’ IP addresses as well as the date and time of purchase.
- Set up your internal processes to show the customer’s order history, including all their transactions.
2. Use Strong Authentication
3D Secure 2.0 (3DS2) is an updated authentication protocol that offers an extra layer of protection against fraudulent transactions. It uses a three-way authentication process which helps confirm the buyer’s identity. This reduces the chance that a transaction is fraudulent.
The European Union requires companies to comply with the Payment Services Directive 2 (PSD2). One component of this is Strong Customer Authentication (SCA) – a protocol that asks merchants to add at least 2 different authentication pathways for every purchase from a new customer.
Stronger authentication can help your business catch fraudulent transactions before they go through. This won’t prevent chargeback fraud, as this type of fraud is committed by the actual cardholder, but it can reduce the number of chargebacks your business faces, which could save your business a lot of money in the long run.
3. Use Clear Communication
Improving the clarity of your communication can help you experience far fewer cases of accidental chargebacks.
Here are some ways you can do this:
- Make it easy for customers to contact your business to ask about transactions.
- Make sure your billing descriptor is recognizable and clear.
- Make sure your returns, refunds, and cancellation policies are succinct and clear.
- Use automated order confirmations for customer transactions.
The Benefits of Using Pay.com as Your Payment Service Provider
Pay.com can give your business access to cutting-edge security features and the highest level of protection from fraud. We have Level 1 PCI DSS compliance, meaning that every transaction is protected at the highest level.
We also implement the following security measures:
- Credit card details are tokenized in transit, meaning the numbers themselves aren’t stored on our servers. In the unlikely event that our servers were to get hacked, the attackers won’t gain access to your customers’ credit card details.
- We support 3D Secure 2.0 (3DS2), providing your business with an extra layer of protection. Depending on certain factors, some customers may receive a two-factor authentication request from their credit card company.
Another benefit of working with Pay.com is the intuitive Pay Dashboard. This is a central hub where you can oversee all your payment-related information. It also lets you create custom reports to analyze your payment data.
Pay.com lets your business securely accept a wide variety of payment methods, including credit and debit cards, digital wallets, ACH transfers, and more.
The Bottom Line
Chargebacks and chargeback fraud are a major cost to businesses. Total chargeback costs are expected to surpass $117 billion in 2023, with merchants expected to take responsibility for $79 billion of these costs.
The steps I’ve discussed in this article can help you limit your exposure to both chargebacks and chargeback fraud and can improve your company’s overall revenue.
Pay.com gives your business access to a full-service payment infrastructure. You can accept a variety of payment methods while enjoying the benefits of industry-leading innovations for fraud prevention.