What is Chargeback Fraud?
Chargeback fraud, often referred to as “friendly fraud”, happens when a customer intentionally calls their bank to secure a refund when there was no error on the part of the merchant. In other words, a cardholder can purchase something from you, receive the goods or services, and then call their bank to dispute the charge and get their money back. A consumer will give their bank a variety of reasons for which they want to dispute the charge and oftentimes, the bank simply processes the refund without much investigation.
Understanding Chargebacks
Most merchants will not understand what is a chargeback until it occurs. A chargeback is a type of transaction reversal when the bank takes the money from the merchant and gives it back to the cardholder. It happens when the customer asks their bank for a refund, rather than reaching out to the merchant directly. It’s difficult for the bank to tell when a chargeback is legitimate and when it’s fraudulent, so it’s fairly easy for the customer to win the dispute.
Why Customers Commit Chargeback Fraud
Customers commit chargeback fraud for a variety of reasons. Sometimes, a chargeback is warranted, and the customer is doing the right thing by asking their bank to reverse the transaction. That is rare, though. In most cases, the customer is at fault, and they just don’t want to admit it.
Here are some examples of legitimate chargeback requests vs. chargeback fraud:
| Legitimate Chargeback Requests | Chargeback Fraud |
| Unauthorized purchase appears on the cardholder’s billing statement | A cardholder buys goods online, receives them, and then calls their bank to initiate a chargeback without returning the goods |
| A cardholder canceled a subscription service, but the company continues to bill them | A cardholder makes a purchase and then has buyer’s remorse and asks the bank to give them their money back |
| The cardholder made a purchase and then didn’t recognize it when their billing statement arrived (this often happens when the billing descriptor is unclear) | The cardholder ordered multiple items with the intent of keeping them and asked their bank to refund their money |
Is Chargeback Fraud Illegal?
If a customer is found to be guilty of chargeback fraud, it can result in criminal charges. There have been
cases of major chargeback fraud that were identified, and the fraudsters were caught. However, this is a rare occasion. The problem lies not only with identifying the fraud, but also taking action against it. Many merchants and banks don’t take action because it’s time-consuming and expensive to do so.
For example, if you believe your business has been a victim of chargeback fraud, you may need to involve local authorities, multiple banks, and even some federal bureaus like the FBI. If the fraudster doesn’t live in the same state as your business, you may also be asking for help from these entities across state lines. By the time you chase down the criminal, you might’ve spent far more time and energy than the chargeback itself was worth.
How to Identify Chargeback Fraud
Chargeback fraud is hard to identify because the reasons for disputes can be convoluted. It’s difficult to determine the cardholder’s true intent when filing the chargeback. Here is a detailed look at some of the key reasons why chargeback fraud is hard to identify.
Inaccurate Bank Reason Codes
When cardholders initiate the chargeback process, they have to specify a reason for the dispute. They often give inaccurate information at this point because the request is fraudulent. If merchants don’t investigate every single chargeback, there’s no way to identify fraudulent vs factual.
Convenience
Sometimes people think that reaching out to their credit card company will be easier than asking the merchant for a refund. Seemingly innocent cardholders will simply call their credit card company to get their money back, and the merchant is not made aware of the situation until it’s too late. This makes it difficult to back and research after the fact.
Lack of Regulations
Chargebacks are a gray area when it comes to consumer protection regulations. The chargeback process was required by law to be implemented, but the regulations were written before the internet existed. Although some reform has happened over the years in these regulations, they are still not designed to keep up with the fast pace of eCommerce today.
Lack of Investigation
Although most banks say they have an investigation process for such claims, they often don’t use it. They tend to assume the customer is right – partly because the merchants tend not to dispute the claims, and partly because it’s more time-consuming to do a full investigation.
Lack of Resources
Merchants, much like consumers, often take the path of least resistance. Investigating every chargeback is quite an undertaking and can cost more money and man-hours than it’s worth. If merchants don’t investigate the chargebacks, credit card companies assume they are legitimate and continue allowing them to be processed.
How to Decrease Chargeback Fraud
There are several steps merchants can take to decrease chargeback fraud in their businesses. If you have a high volume of chargebacks in your business, read on for some helpful tips on how to mitigate the risk.
Optimize the Customer Experience. When a customer turns to their bank for a refund instead of to you, it’s likely that there is a lack of trust or knowledge. If the customer doesn’t know about your refund policy, or feels like your company is difficult to reach, they will turn to their credit card company because it’s easier. Make sure the customer experience on your website is simple, informative, and comfortable. Help them build a relationship with you so they will reach out to you with any issues that arise.
Fight back. In many cases, chargeback fraud continues to happen because merchants don’t fight it. If you invest in this area of your business with tools, technology, and people, you will be able to fight back. Be sure to investigate chargebacks and file an appeal with the credit card company if you think the dispute is fraudulent. The more you do this, the less likely the banks will be to just overlook the chargeback and return the money to the cardholder.
Use Anti-Fraud Tools. Many merchants overlook this critical piece of the puzzle. However, tools like this can be a game-changer in your business. Start by talking with your payment processor to see what tools they have available through their platform. Implement the ones that work best for your business. If you still need more, consider switching processors, or reaching out to a third-party vendor whose tools can integrate with yours.
Utilizing Blacklisting Technology. You can keep repeat offenders from continuing to file disputes by not allowing them to purchase from you. This technology can also help you identify trends to find out which transactions are more likely to be fraudulent. From there, you can modify your systems accordingly.
Final Thoughts
Chargeback fraud is a pain point for merchants across the country. Fighting back can seem like it’s not worth it, especially if you do a high volume of low-ticket transactions. However, those small charges can add up overtime. You can decrease chargeback fraud by implementing tools and fighting back when necessary.
