Don’t Let Chargeback Fraud Ruin Your Bottom Line

It’s a typical Monday morning. You’ve just brewed a comforting cup of tea and are about to dive into the weekend sales reports for your online store. As usual, business seems to be booming until a glaring anomaly catches your eye – an alarmingly high number of transaction reversals over the weekend. A sense of unease creeps in as you probe deeper, only to uncover a chilling truth. Your business has become the latest prey to an insidious form of fraud, chargeback fraud. Panic bubbles up as you realize the gravity of the situation: you’ve not only lost your precious merchandise, but you’ve also unknowingly refunded the fraudsters for those same goods. The scammers have walked away with your products and their money, leaving you in their dust.

This scenario is not just a hypothetical scenario. Many merchants have grappled with chargeback fraud, which has increased over the last three years. According to Business Wire, 65% of the merchants surveyed have seen an increased rate of chargeback fraud. Chargeback fraud is a growing concern and causes significant financial and reputational damage to businesses. Even worse, it hits them with a double whammy.

In this article, we delve into chargeback fraud, deciphering its workings, its consequences, and the safeguards you can put in place to protect your business. Equipped with the proper knowledge and proactive measures, you can fortify your business and reclaim the serenity of your Monday mornings.

Understanding Chargeback Fraud

In simple terms, chargeback fraud is a scam where a person makes a purchase, often a high-value item, with a credit or debit card. After the transaction has been approved and the item received, they contact their bank or card issuer and request a charge reversal. This is often done by claiming the transaction was fraudulent, that they did not receive the item, or that the item was not as described. The bank or card issuer then reverses the charge, returning the money to the cardholder, leaving the merchant without payment for the sold item. It’s a lose-lose situation for businesses and a win-win for fraudsters.

It’s important to note that legitimate chargebacks exist. The United States Federal Trade Commission data reports that consumers were defrauded of nearly $8.8 billion in 2022. This shows that the ability to do legitimate chargebacks is a valuable consumer protection tool, as consumers regularly are victims of fraud, such as card skimming and account takeovers. In these cases, chargebacks do protect consumers from fraudulent transactions, as well as from merchant errors or situations where purchases were not delivered as promised. However, transaction reversal fraud is an abuse of this process.

Preventing this type of fraud can be challenging for merchants. It often involves keeping detailed records of transactions, including delivery confirmation for physical goods and other evidence that the purchase was legitimate and the item was delivered as promised. In some cases, it may also involve disputing the chargeback with the bank or card issuer.

Common Types of Chargeback Fraud

Businesses should be aware of several common types of chargeback fraud to combat this threat effectively. These include:

  • Payment Reversal Fraud: This fraud occurs when a criminal uses stolen credit card information to make a purchase. The legitimate cardholder disputes the charge when they see a transaction they did not authorize on their statement. This is real fraud because the person committing it uses stolen information for personal gain.
  • Merchant Error Fraud: This fraud occurs when the merchant makes a mistake, such as billing the customer more than once or charging an incorrect amount. In these cases, customers have a legitimate reason to request a chargeback. While this is not technically fraud on the part of the customer, it can be a form of merchant fraud if done consistently and intentionally.
  • Friendly Fraud: A customer purchases with their credit card, receives the product or service, and then requests a chargeback from their credit card provider, falsely claiming the transaction was not authorized or the product was not received. It’s called ‘friendly’ because the fraud is perpetrated by people who appear to be ordinary customers rather than criminals. Friendly fraud accounts for about 50% of chargeback fraud, according to Riskified.
  • Cyber Shoplifting: This is a variant of friendly fraud where a customer makes a purchase, receives the product, but then files a chargeback claiming they never received the item. Essentially, they’re shoplifting by acquiring goods and retrieving their money through a fraudulent chargeback.
  • Digital Goods Fraud: This is a form of friendly fraud specific to digital goods and services. Because digital products can’t be physically returned, this type of fraud is especially challenging to fight. For example, a customer could use a service (like software or a subscription) and then file a chargeback claiming the service was not as described.

Strategies for Preventing Chargeback Fraud

Chargeback fraud can be hard to detect, given its deceptive nature and the variety of tactics scammers use, but don’t lose heart; there are several strategies you can employ to safeguard your business against it.

  1. Clear and Detailed Product Descriptions: Ensure your product descriptions are clear, detailed, and accurate to prevent misunderstandings about what the customer is purchasing.
  2. Excellent Customer Service: Provide excellent customer service, and make it easy for customers to return items or to contact you with complaints. Often, customers resort to chargebacks because they can’t quickly resolve an issue with the merchant.
  3. Use a Recognizable Payment Descriptor: Customers should recognize the transaction easily when they see their credit card statement. They may dispute the charge if your business name or the product’s name isn’t recognizable.
  4. Keep Detailed Records: Maintain records of customer purchases, communications, and any other interactions. This information can be vital when disputing a chargeback.
  5. Implement Security Technologies: A secure transaction environment is one of the first and most effective lines of defense against many forms of fraudulent activities, including chargeback fraud. Having the appropriate security technologies is essential to your fraud prevention strategy. An effective fraud prevention system should be adaptable, allowing businesses to respond to changing fraud trends and emerging threats.
  6. Real-Time Monitoring and Anomaly Detection Software: Swift detection is key to mitigating the damage caused by chargeback fraud. Implementing real-time monitoring to detect unusual activity as it happens with AI and machine learning is key to quickly analyzing vast amounts of data and identifying fraudulent behavior patterns as they arise. This can help the system flag anomalies and send alerts for better fraud prevention.
  7. Educate Employees and Customers: Knowledge is power, so employee education is critical to successful fraud prevention strategies. Businesses can create a more vigilant and proactive workforce by ensuring that all employees know the risks associated with chargeback fraud and the steps they can take to prevent it. Training programs should cover topics such as the different types of chargeback fraud, common warning signs, and best practices for verifying customer identities. Additionally, employees should be encouraged to report any suspicious activity or potential fraud incidents to management so that appropriate action can be taken.

How INETCO BullzAI Can Help Detect and Prevent Chargeback Fraud

In chargeback fraud prevention, deploying specialized tools such as INETCO BullzAI (BullzAI) can significantly enhance the security protocols of a business. One of the primary attributes of BullzAI is its capacity for real-time transaction monitoring. This feature allows BullzAI to identify potentially fraudulent transactions, enabling companies to respond promptly and mitigate potential damages.

The power of real-time monitoring cannot be overstated. BullzAI’s real-time monitoring capabilities can detect fraudulent transactions as they occur, providing you with instant alerts. This early detection allows businesses to take immediate action, significantly reducing potential losses. As such, BullzAI is not merely reactive to established fraud techniques; it is proactive and capable of adapting to current and emerging threats and Zero-Day attacks.

Moreover, BullzAI has sophisticated machine-learning algorithms that facilitate continuous learning from each transaction processed. This iterative learning mechanism enhances BullzAI’s proficiency in discerning patterns and irregularities that may suggest potential fraudulent payment reversals.

By leveraging tools like INETCO BullzAI, businesses can fortify their defenses against chargeback fraud, ensuring a safer transaction environment for themselves and their customers. Want to learn more about how INETCO can help you secure your transactions? Connect with our team and request a demo today!