Chargeback Fraud: What is it and 4 Prevention Measures
Unfortunately, chargebacks are part of every eCommerce business’s reality. While they were put into place to be a solid protection mechanism for customers, brands are faced with the time-consuming task of separating legitimate transactions from fraudulent payment disputes to avoid costly repercussions.
With more and more reports of hacked databases and leaked customer information, tackling chargeback fraud has become increasingly of concern for online merchants due to the significant financial losses they cause.
In 2021 alone, chargeback fraud has ended up costing online businesses a whopping $20 billion.
It’s high time we talked about this topic, exploring:
Chargeback Vs. Chargeback Fraud
The 3 Steps of The Chargeback Process
How Does Chargeback Fraud Affect Your SaaS
Common Chargeback Fraud Causes
4 Chargeback Fraud Prevention Best Practices
What is Chargeback Fraud?
Chargeback fraud occurs when a customer makes a purchase and disputes the credit card payment, claiming that the transaction was fraudulent or unauthorized.
While this might sound similar to the chargeback process, the difference between the two is that this scenario is fully intentional.
While the common thread is that the consumer initiates the chargeback to receive a refund while keeping the product or service received, there are several forms chargeback fraud takes:
Friendly Fraud
This is the most common type of chargeback fraud, where a cardholder makes a legitimate purchase only to dispute it later, claiming that they either did not authorize the transaction or the goods or services bought did not match the description.
While there may be instances in which the cardholder forgets that they made the purchase or does not recognize it on the billing issue, there is a clear desire to exploit the chargeback process in most cases.
Digital Goods Fraud
When selling software licenses or digital goods, your customers may dispute certain charges after accessing the product received. This is a particularly difficult-to-handle scenario because the user typically has plenty of time to download the product before filing the chargeback.
Subscription Fraud
Subscription businesses are often faced with chargebacks from customers disputing recurring charges and claiming that even though the service was canceled, they were still charged.
Chargeback Vs. Chargeback Fraud
Chargebacks were not created with the intention of giving users the means to conduct criminal activity. Quite the opposite, actually.
Traditionally, chargebacks are meant to be a protection tool for customers.
Unfortunately, fraudsters are increasingly ingenious when it comes to new ways to deceive merchants, managing to corrupt this premise as well.
Because chargebacks are a sensitive topic for all those involved, it’s important to take the right measures, and the first step in doing so is learning to differentiate between lawful chargebacks and false ones.
Real Chargebacks
It is a legitimate protection mechanism created by credit card companies to prevent fraud for customers.
However, order product issues, products not received, incorrect amounts charged, and fraud are all reasons used in chargeback disputes.
Fraudulent Chargebacks
It is a criminal fraud practice when the consumer disputes a legitimate transaction with the intention of gaining a refund without reason.
An illegitimate chargeback abuses the protection mechanism and benefits the fraudster while also causing significant damage to the online brand in question.
Chargeback fraud consequences come in different forms, from chargeback fees and increased operational costs to extensive reputational damage.
Common Chargeback Causes
To effectively combat and prevent chargeback fraud, you must understand why it happens. Or better said, when it happens.
Recognizing that not all chargebacks result from fraudulent activity, it’s essential to be skilled in carefully examining chargeback alerts in a timely manner and swiftly distinguishing between valid claims and those rooted in fraud.
The foundation for accurate identification lies in understanding the underlying causes of chargebacks.
Inexperience with Chargeback Procedures
For a large number of customers, the concept of chargeback is quite abstract, being completely unfamiliar with it.
This can lead to many unintentional chargeback requests, which could have been easily solved through a refund. Instead of contacting their eCommerce merchants, customers contact the bank, which causes the transaction to be flagged as a chargeback.
Misinterpretation of Refund Policies
Communication is key to success in the online world as well. Like all eCommerce companies, SaaS businesses need to have clear refund policies that leave no room for misinterpretation.
If a customer is unsatisfied with the product or service purchased, the refund policy should be the first step in resolving the issue. But, because of unclear procedures, customers often resort to chargeback requests.
Accidental Chargeback
Error is human, which is also true in the digital world.
The legitimate cardholder can simply forget about a charge and assume it’s a fraudulent transaction. It’s sometimes an honest mistake, considering the average US consumer can have up to 12 subscriptions at any given time.
Intentional Chargeback Fraud
Since we have discussed how a legitimate charge can end up filed as a chargeback, it’s time to talk about the most dangerous of all causes that keep chargeback rates up lately: fraud.
Using stolen credit card information fraudsters can use stolen credit card info to purchase products. Then, the legitimate card owner will make a chargeback because they do not recognize the charge.
Discover 4 chargeback fraud prevention best practices on PayPro Global’s Blog.
