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Understanding and Mitigating Fraudulent Chargebacks
The problem of fraudulent chargebacks is more common than a lot of business owners believe. As a matter of fact, it is estimated that by 2026, merchants will lose $28.1 billion to chargeback fraud.

Considering the fact that each successful chargeback costs merchants at least twice as much as the original transaction, the financial losses can be even higher. So, what is chargeback fraud, and how can it be dealt with? Let’s figure it out together in this article.

What Fraudulent Chargebacks Are?

Chargeback fraud, or fraudulent chargeback, occurs when a customer intentionally disputes a legitimate transaction. To put it simply, a customer demands reversing a charge after receiving a product or service. Of course, in many cases, merchants can prove that a charge was legitimate and avoid refunding a customer, yet dispute fees still may be charged (that depends on the terms of the agreement with your payment processor). In any case, chargebacks, especially fraudulent ones, are not a good thing since getting too many may lead to significant revenue losses, approval rate reduction, reputation damage, etc. Thus, it is important to prevent all chargebacks, including chargeback fraud.

Types of Chargeback Fraud

There are several types of chargeback fraud, and it is important to understand each one to know how to deal with them. So, let’s take a quick look at the most common types of chargeback fraud:

  • Friendly fraud. In many cases, this type happens unintentionally when a customer forgets they or someone else in their household made a transaction, so they believe they were a victim of fraud and issue a chargeback. It can be prevented by clear communication with your customers and using chargeback prevention systems.

  • Card not present (CNP) fraud. This type occurs when a stolen credit card is used to make a purchase. A reliable chargeback prevention and fraud protection software will help you deal with CNP fraud.

  • Transaction dispute. In this case, a customer claims they were charged the wrong charge, for example, more than a product/service cost. To prevent that, use secure payment methods and anti-fraud systems.

  • Item not received. In a lot of cases, customers falsely claim they did not receive a product they paid for. To solve this problem, you need to cooperate with reliable shipping companies and make sure there is always proof that a product was indeed received.

  • Product/service dissatisfaction. Lastly, customers may issue fraudulent chargebacks due to dissatisfaction with the product or service to receive your goods or services for free. In this case, make clear refund and return policies and make sure to inform your customers about them so that you can get your product back.

These are the main types of chargeback fraud, yet cybercriminals always come up with new schemes, so you have to stay alert and be ready to deal with all the possible challenges that may come.

How to Prevent Chargeback Fraud

As we have already mentioned above, preventing chargeback fraud is essential for preserving your revenue, reputation, and good relationships with your payment processors. Yet many business owners still do not know efficient strategies for preventing fraudulent chargebacks. So, here are some tips and tricks on preventing chargeback fraud from us:

  • Chargeback prevention and fraud protection systems. Using reliable fraud protection and chargeback prevention systems, like the ones available within Germius CRM, is one of the best solutions for your business. Yes, these services are a bit costly, yet they completely justify their price. In fact, using these tools helps reduce the chargeback fraud rate by 70%.

  • Strong order verification. Requiring additional info like home address, using address verification service (AVS), and utilizing 3D Secure will help you reduce the number of CNP fraud and, therefore, fraudulent chargebacks.

  • Clear communication and documentation. To prevent friendly fraud, provide detailed order info, document each and every transaction, and offer customer support service so that in case of any issue, your customers reach out to you instead of issuing a chargeback. 

  • Secure checkout. Make your checkout process safer by using SSL certificates, avoiding storing sensitive data, and tokenizing card information. 

  • Educating your employees. Finally, educate the employees in the sales department, so that they can easily distinguish suspicious customers and orders and simply block them right away.

These tips will help you decrease the chargeback fraud rates and, therefore, protect your revenue and reputation among your customers and business partners.

Final Thoughts

Fraudulent chargebacks occur more often than a lot of business owners believe and cause many unpleasant consequences. Fortunately, there are ways to prevent friendly fraud and protect your revenue and reputation, such as the ones we discussed above, so why don’t you try those?