Author: Tom-Chris Emewulu
Digital Evangelist

What you need to know about chargeback fraud and how to prevent chargeback fraud effectively.

The quantum of friendly fraud attacks carried out by cardholders over the last few years is unbelievable. And then, the pandemic came into the mix and escalated the already worsening situation.

Here are some numbers:

~$20 billion: The amount of money eCommerce merchants lost in 2021 due to criminal activities. That represents an 18% uptick over the $17.5 billion lost in 2020, a study released by Juniper Research says.

~$117.47 billion: Estimated value of global chargeback cost by 2023, with average industry cost per chargeback expected to reach $191.

~$25 billion: Total losses from friendly fraud over a year, according to the NRF. Friendly fraud account for up to 75% of all transaction disputes.

33 million: The number of disputes expected from 66 billion transactions in 2022, including fraud, authorization failures, processing errors, and consumer disputes, according to Mercator Advisory Group.

If there’s ever a time to grasp chargeback fraud causes and mitigation best practices firsthand, now is the time. And in this post, we’ll go over the following topics:

i. What is chargeback fraud?

ii. How serious is chargeback fraud? And what are the types of chargeback scams?

iii. How to prevent chargeback fraud.

iv. How to recover chargebacks on autopilot.

Let’s dig in!

What is chargeback fraud?

Chargeback fraud, also known as friendly fraud, is when a cardholder makes an online transaction with their credit card and then files a chargeback with the issuing bank after receiving the purchased goods or services.

Such fraudsters falsely complain they didn't receive their purchased order, that it wasn't what they expected to receive, that they did not authorize the transaction, or that they had requested a cancellation of recurring transactions and the seller billed them anyway.

However, none of such reasons hold any water. For chargeback fraud, the actual reason is that the consumer wants to game the system and get something for nothing. We shall discuss that further subsequently.

How serious is chargeback fraud? And what are the types of chargeback scams?

Chargeback fraud presents a significant business sustainability risk to merchants. It's a vicious cycle impacting individual merchants and the entire eCommerce ecosystem.

Banks don't have time to ascertain the merit of every cardholder dispute. Merchants often write off chargebacks as the cost of doing business (due to the uphill battle of fighting fraudulent disputes). Consequently, banks are not eager to adopt policies and instruments that deter con artists from weaponizing the chargeback process. Banks see merchants' ignoring chargebacks as total admission of guilt, making them eager to side with cardholders.

At the end, when merchants don’t keep their chargeback rates under the established chargeback limit, card networks place them in fraud or dispute monitoring programs. That brings underlying issues like excessive processing fees, reputational risks, and ultimately loss of payment processing rights – which is often a nail in the coffin for the business.

What are the types of chargeback scams?

However you look at it, chargebacks are the worst.

Instead of focusing on chargeback reason codes, knowing the various chargeback scams can help you better prepare to stop determined fraudsters in their tracks.

  • Criminal fraud: This happens when a fraudster uses a stolen credit card to make unauthorized transactions from the store you manage. To prevent criminal fraud chargebacks, you must work on tools to help identify the validity of orders and ensure the card's valid owner is making the transaction.
  • Friendly fraud: As stated earlier, friendly fraud happens when a buyer makes a legitimate transaction but turns around to file a chargeback. Suffice it to say also that not all friendly frauds are intentional. In a few instances, it could be an honest mistake of the buyer not recognizing the bill. But mostly, research shows friendly fraud is intentional. 81% of cardholders admitted they filed a chargeback out of convenience.
  • Merchant error: These chargebacks result from internal mistakes rather than malicious third-party intent. And they are pretty slippery than direct attacks. Customer experience errors often lead to legitimate disputes and chargebacks. Faulty business practices can be tricky to identify. And it's even tougher to remedy as you have to examine your entire process and try to pinpoint loopholes that could cause the chargeback. In some cases, it could be an order return process that you need to optimize. Or that you need to rework your billing descriptor.

How to prevent chargeback fraud.

According to a Kount report, businesses say their top challenges are all in chargeback prevention strategies.

“32% of respondents say a lack of experience with chargeback prevention is their company’s top chargeback challenge. 22% say a lack of chargeback prevention strategies is their company’s top chargeback challenge. And 17% of respondents say not enough resources to dispute chargebacks is their company’s top chargeback challenge.”

Hence, you will do the business you manage much good if you know the best practices for preventing chargeback fraud.

Here’s how:

  1. Prevent criminal fraud chargebacks with a multilayer fraud mitigation protocol. A single isolated fraud prevention tool might not cut it here. You need a multilayer approach.

It would help if you had several fraud detection mechanisms that complement each other to give you a detailed impression of each transaction. Consider deploying relevant fraud scoring tools to screen every transaction and rank the order by potential fraud risk. You can then review flagged purchases manually or reject them outright.

  1. Prevent friendly fraud by stopping transaction dispute triggers. The fact is, it's impossible to stop friendly fraud chargebacks completely. The reason is simple. Friendly fraud chargebacks are difficult to notice and even more challenging to mitigate professionally.

You don't know what the buyer intends until and unless they initiate a dispute. Therefore, the best practice is to ensure you do a great job in eliminating internal errors and stopping criminal fraud triggers. When you've done that, you can get ready to fight friendly fraud chargebacks – and show that your business is not an easy fall. While that might not stop determined criminals, it will prevent them from marking your company.

  1. Prevent merchant error chargeback by optimizing your systems. Merchant error chargebacks originate from poor systems and procedural mistakes. You can identify issues and make necessary remediations by having a dispassionate review of your entire order processing, customer journey, and compliance.

Recover chargebacks on autopilot with intelligent technology.

I know what you might be thinking.

It seems pretty easy to pinpoint the three chargeback types. So why aren't merchants taking the remediation steps to contain the quantum of disputes choking the industry today?

Well, unfortunately, there's no single answer to that question. Knowing the chargeback type is one thing. But understanding the cardholder's intent is another thing.

The great news is that with Chargeflow's automated chargeback mitigation framework, you can now take the guesswork out of chargeback remediation and recover disputes on autopilot.

And the numbers are precise. While the industry average dispute win rate hovers around 12%, merchants that use Chargeflow are recording up to 75% dispute win rate. Plus that, without lifting a finger.

Chargeflow’s success-based plan means you only get to pay when disputes are won in their favor. That's total freedom merged with financial prudence.

Average Dispute Amount
Average Dispute Amount
$
30
# Disputes Per Month
# Disputes Per Month
#
50
Time Spent Per Dispute
Time Spent Per Dispute
M
20
calculation
You could recover
$500,000 and save
1,000 hours every month with Chargeflow!
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