Chargeback Fraud Scam

Chargeback Fraud Scam

Chargeback fraud, also sometimes called “friendly fraud”, is a scam where someone makes a legitimate purchase with a credit card and then fraudulently disputes the charge with their bank. This results in the money being returned to the customer, even though they keep the product or service.

Here’s how it typically works:

  • The Purchase: The scammer makes a real purchase with their credit card from a merchant.
  • The Dispute: After receiving the item, the scammer contacts their bank and claims the purchase was unauthorized or fraudulent. Common reasons cited include “item not received”, “item not as described”, or claiming their card information was stolen.
  • The Chargeback: The bank investigates and, based on the customer’s claim, may reverse the charge and credit the money back to the scammer’s account. The merchant loses the money for the good or service.

There are two main types of chargeback fraud:

  • Friendly Fraud: This is the most common type, where the customer intentionally disputes the charge for illegitimate reasons. Maybe they regret the purchase or are trying to get something for free.
  • Never Received Goods: In rarer cases, the scammer might receive the product and then claim they never got it. This can be harder to pull off, but some scammers might use stolen credit card information to make the purchase, further complicating things for the merchant.

Chargeback fraud can be a serious problem for businesses, especially online retailers. It can lead to lost revenue, increased costs associated with fighting chargebacks, and even account restrictions from payment processors.

Here are some ways businesses can try to prevent chargeback fraud:

  • Implement strong fraud prevention measures: This can include verifying billing addresses, using CVV codes, and implementing fraud scoring systems.
  • Maintain clear and detailed sales records: Keep good records of transactions, including product descriptions, pricing, and shipping information. This can be helpful when fighting a chargeback.
  • Have a clear return policy: A transparent and easy-to-understand return policy can help reduce disputes and encourage customers to follow the proper channels for getting a refund.
  • Respond promptly to chargebacks: Don’t ignore chargeback claims. Respond quickly and provide any evidence you have to contest the claim.

If you suspect you’ve been a victim of chargeback fraud, it’s important to report it to your bank or credit card company immediately. They may be able to help you recover your funds.

What Is Chargeback Fraud?

Chargeback fraud happens when a customer contacts their credit card issuer or bank to dispute a legitimate purchase and request a chargeback, or refund, for it. This type of fraud happens almost exclusively online and has increased as online shopping has grown in popularity.

Chargeback fraud can be malicious, in the case of customers who knowingly try to “get something for nothing.” But it can also be due to an innocent mistake, like when a customer doesn’t recognize a legitimate purchase on their statement (this is called “friendly fraud”).

Chargeback fraud that is legitimate occurs when the customer circumvents the business and goes directly to their card issuer to request a chargeback. For example, the customer…

  • Claims they never received their order—but had
  • Says they sent back a return that was never processed—though it was
  • Insists they hadn’t authorized the transaction—but had
  • Complains that the item or service wasn’t as advertised—even though it was
  • Claims that a recurring payment was not canceled as requested—even though they never canceled it

When a customer requests a chargeback for these reasons—without contacting the business to resolve the issue and without returning the merchandise—that’s chargeback fraud. Whether they do this maliciously or not, they are essentially cyber-shoplifting.

Is Chargeback Fraud the Same as Friendly Fraud?

On the surface, chargeback fraud and friendly fraud are the same. However, friendly fraud happens because of an honest mistake on the customer’s part. For example, when the cardholder:

  • …doesn’t recognize a legitimate purchase on their statement
  • …forgets they had ever made the purchase
  • …doesn’t realize a family member had bought something with the card
  • …mistakenly thinks that a bank-issued chargeback is just another way to process a return

How Does Chargeback Fraud Hurt Business Owners?

Unfortunately, card issuers are so inundated with chargeback requests that they have scant time or resources to investigate them all, and will often greenlight chargebacks with little or no real evidence, taking the customer’s word for it and passing the damages on to you.

While it may sound astonishing, when a customer requests a chargeback, their refund is automatically deducted from your bank account—as is a hefty chargeback fee levied by your bank.

For business owners, chargeback fraud adds up to lost revenues, sunk shipping costs, potential merchandise shortages, and damaging chargeback fees. Chargeback fraud also costs you time, as you attempt to dispute fraudulent chargebacks and recoup lost income. Be warned: battling chargeback fraud is not easy because the burden of proof falls almost entirely on the merchant, and the chances of getting a charge reversed a slim.

What Is a Chargeback Fee?

A chargeback fee is a price you pay when a customer disputes a purchase. It’s the fee you have to pay over and above the refund that your bank issues to the customer. This chargeback fee can be anywhere from $20-$50 per transaction. Your bank issues this chargeback fee to cover the administrative expense of refunding a customer’s money due to a chargeback request.

Chargeback fees can be very insidious. While a credit card issuer typically notifies you of chargebacks, they often won’t do it for small transactions, like those that fall below $30. Unfortunately, these small chargebacks and chargeback fees can add up if they go undetected, eating holes into your bank account long before you’re aware of them.

How Can You Protect Against Chargeback Fraud?

You can take several steps to combat chargeback fraud and minimize risks to your business:

  • Use strong credit card verification methods. Implement automatic systems that check whether a customer’s credit card billing address matches the one on file with the card issuer. If it doesn’t, you can reject the transaction.
  • Be aware of unusual orders. If a customer orders a large number of products, makes several purchases in quick succession or has wildly different billing and shipping addresses, it may clue you into potential chargeback fraud. For example, organized retail crime rings have been known to order a large number of items to resell, request an illegitimate chargeback, and then retail the merchandise at nearly a 100% profit. If you see something out of the ordinary, contact the cardholder to verify that the transaction is valid (and keep records of the conversation).
  • Confirm all orders. Once an order is placed, send an automatic email confirmation to the customer. This helps prevent friendly forms of chargeback fraud by informing customers that their shipment is being processed, and by serving as a reminder that they made that purchase in the first place. It can also dissuade would-be cyber shoplifters and chargeback fraudsters.
  • Remind customers of recurring payments. Send a notification email to give customers a gentle reminder of an upcoming automatic payment. Friendly chargeback fraud can occur when customers are confused by a recurring payment they had agreed to but had long forgotten about.
  • Use shipment tracking and require signature confirmation. Having proof of delivery is a valuable line of defense against chargeback fraud. Packages left on doorsteps without a signature leave you vulnerable to chargebacks from customers who say they never received your package. Be sure that both you and the customer have access to shipment tracking information, and require a signature for shipments when it makes sense for your business.
  • Use clear transaction descriptions. If a customer doesn’t recognize the name that appears on their credit card statement, they may mistakenly assume that a legitimate purchase was fraudulent, and request a chargeback. For example, if you’re selling healthy snacks under “Metabolic Munchies” but the credit card statement shows a charge from “Healthy Goodness LLC”, the customer may not recognize the transaction. Use clear product descriptions as an added layer of protection against chargeback fraud.
  • Clearly define your return policy. You can counter a customer’s claim to a refund if your policy clearly states that one is not warranted. Chargeback fraud demands a multi-faceted approach, and this should be just one of many defenses in your toolbox.
  • Document conversations and interactions with the customer so that you have a paper trail of evidence to work with if and when you experience chargeback fraud.

How Can PaySimple Help?

When you use a dedicated merchant account from PaySimple, you have the opportunity to defend yourself against illegitimate chargebacks and chargeback fraud. (This is not often the case with aggregator accounts like those provided by services like PayPal.) For more information and resources for defending yourself against chargeback fraud, be sure to read our extensive post on friendly fraud.

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