Best Practices to Prevent Chargeback Fraud

Chargebacks and chargeback fraud are climbing quickly, and it’s sinking ecommerce profit. What’s worse, most analysts don’t feel they have the right tools to fight back as friendly fraud becomes more frequent. Ultimately, chargebacks and chargeback fraud are damaging ecommerce companies' reputations, triggering higher fees and costing long-term business. 

However, there are simple ways to prevent chargeback fraud and keep more money flowing through the organization. In this article, we examine the biggest problems with chargebacks and lay out the best ways to prevent chargeback fraud.

What Is Chargeback Fraud?

To understand chargeback fraud, it’s important to define chargebacks. Chargebacks occur when a person disputes a transaction and the original charge is revoked. Chargeback fraud is anytime a person abuses this system, either on purpose or accidentally. 

Although it’s possible for criminals to use stolen credit cards or synthetic IDs to commit chargeback fraud, a more common type of chargeback fraud is friendly fraud. This is where a customer issues a chargeback for a legitimate order, usually due to buyer’s remorse, forgetting purchases, misreading bank statements, shipping errors or dissatisfaction.

Chargebacks and chargeback fraud can hurt ecommerce companies in several ways:

• The ecommerce company loses revenue on charged-back merchandise.
• The company ends up paying chargeback fees.
• Payment providers may increase rates or ban a company from using its services.
• Customer service can suffer, damaging the company’s reputation and wrecking long-term business.

Chargebacks and Fraud Are on the Rise

Unfortunately, for ecommerce companies, chargebacks and chargeback fraud are growing quickly. Estimates suggest chargebacks cost companies $40 billion per year globally. At the same time, friendly fraud is becoming an overwhelming concern for many businesses. One study found that 9 out of 10 merchants are worried about friendly fraud, but fewer than 1 in 3 felt like they were addressing it successfully. 

The pandemic may have, at least partially, fueled the spike in chargebacks. As customers hunkered down, they flocked to online services, and that increase in activity has attracted fraudsters. At the same time, the pandemic has triggered a digital acceleration among companies that increases their vulnerability to online identity fraud. In fact, 81% of fraud professionals believe digital transformation is increasing their organization’s vulnerability. 

This uptick in online behavior has led to more opportunities for fraudsters to attack during the Covid pandemic, and this upswing in fraud attempts may be overwhelming ecommerce fraud-prevention teams when they’re at their most vulnerable. When companies spend extra time trying to compensate for those vulnerable areas in their digital transformation strategy and working to spot cases of identity fraud, they often simply skip over legitimate purchases—even if a legitimate customer is falsely requesting chargebacks.

All the while, consumers are running into more opportunities to wrongly dispute charges. Consumers may be eyeing their bank statements more closely as they make more online purchases, or they could be making more frequent errors as they lean on autofill or voice-command devices. Regardless of the cause, chargebacks are rising, and merchants are paying for it. 

Why Is Chargeback Fraud Prevention Failing?

In most cases, merchants simply don’t have the time or proper fraud techniques to quickly identify chargeback fraud. That’s because many online companies are using traditional fraud-prevention methods, where analysts and manual reviewers reactively watch for single points of fraud. That makes it difficult, if not impossible, to identify which transactions are legitimate, which chargebacks are customer errors and which instances are fraud. 

Because ecommerce companies often don’t have the time or tools to identify friendly fraud, they rarely dispute chargebacks. In turn, they lose money. All the while, by not pushing back against illegitimate chargebacks, the merchants end up signaling to payment companies that these chargebacks are warranted—essentially accepting blame whether the ecommerce company was at fault or not.

How Can Merchants Prevent Chargeback Fraud?

Merchants do have the power to stop chargeback fraud before it happens as long as they follow a few best practices. Here are some ways to prevent chargeback fraud:

Reduce chargebacks by eliminating fraud.

One way to reduce chargebacks is to eliminate identity fraud. When you can fight identity fraud confidently and know which buyers are legitimate, it’s easy to spot chargeback errors. However, eliminating fraud isn’t as simple as doubling down on traditional fraud-prevention methods. Instead, merchants need to adopt a more holistic approach to fraud prevention. That means establishing trust by examining a buyer’s connections, online relationships and full digital history. 

Leverage better data to prevent fraud.

Companies can also reduce chargebacks by adopting better data. More accurate data pulled from a wider range of online and offline sources can help derive comprehensive identity intelligence for a fuller identity picture. And you can use modern tools to see these in-depth trust profiles. For instance, some advanced platforms use machine learning technology to evaluate a buyer’s relationships and formulate trust scores your team can easily access. With that data in hand, it’s easy to know when fraud is truly taking place and to stop friendly fraud before it inflicts any financial damage to your company. 

Start Preventing Fraud and Chargebacks

The best way to stop chargebacks and fraud is to start identifying trust within online transactions. And learning to proactively see trust may be easier than you realize. Read our whitepaper, Trusted Identities: A New Paradigm for Fighting Friendly Fraud, now to learn how to spot trust, reduce fraud and stop costly chargebacks.