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A quick guide to understanding and preventing chargebacks

Online retailers operating with historically high levels of fraud on their site are unintentionally leaving their businesses at risk. Rampant levels of chargeback fraud can result in unnecessary fees, diminished consumer confidence in your online store, and leave your business at risk of losing your merchant account.

To protect your business, your company needs to make sure you’re taking precautionary steps to minimize the amount of card-not-present fraud on your site. Keep reading to learn about the different types of fraud online retailers commonly face and learn the strategies to help you minimize your exposure to fraudulent chargebacks.

  1. What are chargebacks and how can they contribute to ecommerce fraud
  2. Understanding fraud’s impact on online retailers
  3. Recognizing the difference between true fraud and friendly fraud

Let’s start by reviewing what chargebacks are and their role in ecommerce.

What are chargebacks and how can they contribute to ecommerce fraud?

Chargebacks allow consumers to dispute a transaction and receive a full refund. Once the customer’s bank receives a chargeback dispute, they work with the retailer to issue a reversal of funds back to the customer. Unlike a traditional refund, a chargeback doesn’t require that the customer work with the business to get their money back – the reversal of funds is handled entirely by the customer’s bank on their behalf.

Since chargebacks are meant to protect shoppers against unauthorized transactions the entire process is skewed towards the side of the customers. Instead of wasting time and energy arguing with a retailer about the legitimacy of the transaction, shoppers can initiate a chargeback to get their money back.

Chart that shows the chargeback process

How rampant chargeback abuse hurts retailers

We’ve touched a little on how customer-centric chargebacks are, unfortunately, some customers will abuse the process by filing illegitimate chargebacks in an effort to receive an item or service for free. Once a shopper has initiated a chargeback, the customer’s bank will debit funds from the retailer’s merchant account as reimbursement. It’s then up to the retailer to dispute the chargeback and provide evidence that the customer was responsible for making the purchase.

The entire dispute process can be time-consuming, retailers often have to pull internal resources to find sufficient evidence to help them win. They’re also responsible for covering the chargeback fees (usually anywhere from $20-$100) involved in the process. If you’re a high-risk merchant you can expect to pay an even higher fee.

Understanding fraud’s impact on online retailers

High occurrences of fraud and chargebacks can negatively impact your business by cutting into your bottom line. When retailers accept fraudulent fractions on their site, they’re liable for covering the cost of the lost inventory and reimbursing any charges incurred by the fraudsters.
Hidden costs such as lost time and resources managing chargeback disputes can further cut into your margin.

The true cost of fraud:

Chargeback fees

Credit card chargebacks represent a big financial threat to retailers. Every time a chargeback is issued, your acquiring bank will levy a non-refundable chargeback fee to help cover the administrative costs associated with the chargeback process. On their own, these fees are nominal but if your site is already dealing with high chargeback rates – these small fees will eventually add up and take a bigger bite out of your earnings.

Resource loss

Spending in-house resources to verify each chargeback or review a suspicious order is time-intensive and not an efficient way to allocate your resources. Your staff needs to ensure that the legitimate cardholder was responsible for authorizing the purchase using their debit or credit card. This time could have been allocated to growing your business or further developing your product.

Merchant account closure

Your chargeback rate plays a role in helping to determine your risk and reliability in the eyes of banks. A 1% chargeback rate is the industry-standard maximum — that equates to one chargeback per 100 successful orders. Anything higher than 1% leaves your business at risk of losing your merchant account and being dubbed as a “high-risk merchant”.

Recognizing the difference between true fraud and friendly fraud

We’ve identified the various ways chargeback fraud can impact your business, in this section we’ll breakdown the different types of fraud that most commonly affect online retailers.

Image of true fraud

True Fraud

When online shoppers hear “fraud”, they most likely associate an image of a scrupulous criminal using a lost or stolen credit card to make purchases. Hostile account takeovers and identity theft continue to be the two leading causes of true fraud in ecommerce.In situations where true fraud occurs, both the customer and retailer are affected. The customer must quickly file a chargeback request in order to dispute the unauthorized charges and the retailer has to cover the costs of the lost goods and any chargeback fees.

Tactics to help curb true fraud on your site:
Since true fraud occurs when fraudsters get access to payment information, your business should take extra precautions to ensure your site is secure. Following these industry-best practices should help you provide customers with a secure shopping experience and minimize the likelihood that you’re processing fraudulent transactions.

1. Make sure that your site is PCI-DSS compliant
The Payment Card Industry Data Security Standard applies to all businesses handling sensitive cardholder data. By requiring online merchants to adhere to strict protocols around data security from the start, PCI DSS aims to protect users from payment card fraud before it happens. Proper PCI compliance is enforced by the PCI Security Standards Council, a consortium of leading payment brands including VISA, American Express, and Mastercard.

2. Ensure you’re capturing CVV for each transaction
Requiring Credit Code Verification Value (CVV) helps add another layer of security to the mix. Asking for the three- or four-digit code (commonly printed near the signature strip on the back of the card) helps prove that the shopper has the physical card at the time of purchase.

3. Authorize purchases with 3-D Secure
3-D Secure works like an online PIN code. Before a shopper can complete the checkout process, they’re taken to another security window and prompted to enter their unique security code. Once their personal identification number is verified, the user will be taken back to their checkout and allowed to complete their purchase.

4. Watch for potential indicators of fraud
Requiring extra verification is a great way to minimize ecommerce fraud on your site, but sometimes these security features can still miss out on fraudulent orders. Transactions that set off these red flags should warrant a second a review by your team to verify their legitimacy.

    • Orders with large ticket items
      High ticket items are often the target of fraudsters, be sure to carefully review these transactions especially if the customer checking out has not previously purchased items from your store.
    • Billing and shipping address do not align
      Ruling out instances like gift purchasing, different shipping and billing addresses might be grounds for you to take a closer look at the transaction in question.
    • Multiple orders in short span
      Verify these orders with the cardholder or the issuing back to rule out any instances of unauthorized card use. Another thing to keep an eye out for is seeing if these orders were made using different credit cards but shipped to the same address.

Friendly Fraud

Friendly fraud isn’t widely known as true fraud, but it also affects millions of retailers worldwide. Unlike true fraud, friendly fraud is often initiated by the actual cardholder. A shopper might file a fraudulent chargeback on a legitimate purchase in hopes of receiving a full refund, and since the cardholder isn’t required to return the item, they’ve essentially netted a free product. Friendly fraud can also occur when a shopper is unsatisfied with your return policy and feels that filing a chargeback is the only way to get their money back.

 


Tactics to help curb friendly fraud:
Whatever the reason may be behind why a customer has initiated the chargeback, your business must ensure that you have ample evidence to help prove that there is something fraudulent going on.

1. Capture CVV and AVS
Many of the same security features used to deter fraudsters, including (CVV) and Customer Address Verification (AVS), can also be used to combat friendly fraud.CVV codes can’t be stored by retailers, which also means that they can’t be stolen by criminals. If a valid code is entered during a transaction, it’s safe to assume that the customer has the physical card in their position during the purchase. Running a quick AVS check to validate that the billing address matches the one on file with the customer’s credit card company can also help you argue that the purchase was authorized by the rightful cardholder. This is based on the assumption that a fraudster probably wouldn’t know the account billing address. Retaining this information can also strengthen your chances of winning a chargeback dispute in the case of friendly fraud, since they will help show that the customer fully intended to purchase the product, and filed an illegitimate chargeback.

2. Focus on establishing a good relationship with your customers
Customers want to feel they feel they can come to you first to resolve any problem related to their purchase. Clear and frequent communication with your customers helps them better understand your company’s delivery and return policies, and having a responsive support team increases the likelihood that they’ll reach out with a question first instead of reactively filing an illegitimate chargeback request.Small issues like a questionable charge on your customer’s credit card statement can easily be resolved by your support team. The purchased product might simply be listed under a different name than what the customer saw on your website. Having a support team handy to explain situations like this to your customer can help ease their fears. A customer-centric return policy can also be a powerful deterrent against friendly fraud. Customers don’t have to rely on their bank to get their money back if they know that they can easily be refunded or receive another product of similar value.

3. Include shipping and delivery information
For some customers, online shopping is still a particularly new way to buy and can be filled with uncertainty. Help calm your customer’s nerves and ease their fears by including all necessary tracking and shipping formation information in your confirmation emails. Having clear timelines around delivery dates helps set expectations around when customers will receive their items.

4. Ensure your product pages are up-to-date
Chargeback disputes often arise when customers feel that the product they’ve received didn’t meet their expectations. Update your product descriptors and images to accurately reflect the item your shoppers will actually receive in the mail. Be sure to note all specifications so shoppers are completely aware of what exactly they’re purchasing.

5. Furnish your product pages with user reviews
Product reviews help enrich your product pages with additional insights from past customers. These user reviews can help shoppers better understand the product and help them decide if they really want to make a purchase. These reviews add additional depth to your product pages – helping to increase buyer confidence while simultaneously reducing the likelihood they return an item, or worse, filing a chargeback to get their money back.

Chargeback prevention is an ongoing process

Letting chargeback fraud run rampant on your store can impact your profitability and operations. As more shoppers look to ecommerce to complete their shopping requirements, fraudsters and cybercriminals will also seek to capitalize on this growing trend. Retailers who aren’t proactive about chargeback prevention are leaving their businesses at risk.

While there is no clear cut recipe for completely eliminating fraud from your online store, the tactics and strategies outlined in this post should serve as a foundation to help you better recognize the various forms of fraud that can impact your business and provide some guidance on best practices for minimizing your susceptibility to fraudulent chargebacks.

If you’re interested in getting more comprehensive tips to better help you combat ecommerce fraud and help you better navigate chargeback disputes, download our free ebook: https://www.bolt.com/ebook-preventing-and-handling-chargeback-disputes/

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