How to Limit the Risks of Chargeback Fraud
Chargeback fraud can be costly and time-consuming for businesses. By definition, chargeback fraud occurs when customers contact their credit card issuer to dispute a charge on their statement. The credit card issuer will then reverse the charge, leaving the business to absorb the loss.
In some cases, chargebacks also result in additional fees. Unfortunately, chargeback fraud is becoming more common as eCommerce sales increase and criminals become more sophisticated in their methods.
One way to limit the risks of chargeback fraud is by being aware of sound practices and working with a third-party processor. By taking measures to prevent chargeback fraud, businesses can protect themselves from unnecessary losses.
In this blog, we will discuss why chargebacks occur, different types, and methods to limit fraud risks.
Why do Chargebacks Happen?
While there are many reasons a customer might initiate a chargeback, some of the most common include:
- Unauthorized transactions. This chargeback occurs when customers claim they did not authorize a transaction. This can happen if someone steals the customer's card and uses it without authorization or if a business fails to obtain proper authorization for a transaction.
- Merchandise Not Received. If customers never receive the merchandise they ordered, they may initiate a chargeback. These chargebacks are also common when customers receive merchandise that is different than advertised.
- Billing Errors. Chargebacks can also occur if a customer feels there was a billing error on their statement. This could include charges for items or services the customer didn't receive or discrepancies in an item’s advertised and final price.
- Fraud. In some cases, customers may initiate chargebacks due to fraud. This could include situations where someone uses a customer's card without permission or when a business makes an unauthorized charge to a customer's account.
What are the Different Types of Chargebacks?
There are four main chargebacks: friendly fraud, merchant error, true fraud, and authorization issues.
- Friendly eraud. Friendly fraud occurs when a customer initiates a chargeback for a legitimate purchase. This type of chargeback is sometimes called "accidental chargeback" or "dispute fraud." Friendly fraud can happen when a customer doesn't recognize a charge on their statement or if they forget they made a purchase. In some cases, friendly fraud may also occur if the customer is unhappy with their merchandise.
- Merchant error. Merchant error chargebacks occur when a business makes an error in processing a customer's purchase. This could include mistakes like entering the customer's information or failing to obtain authorization for a transaction. Authorization chargebacks occur when a business fails to obtain approval for a transaction. This could happen if the customer's credit card expires before the transaction is processed.
- True fraud. True fraud chargebacks occur when a criminal uses stolen credit card information to purchase without the cardholder's permission. This type of chargeback is also sometimes called "identity theft."
How to Limit the Risks of Chargeback Fraud
Fortunately, there are steps businesses can take to limit the risks of chargeback fraud.
Here's what we recommend:
Be aware of your customer
One way to prevent chargeback fraud is by being aware of your customers. If you know your customers well, it will be easier to spot suspicious activity.
Obtain proper authorization
Before processing a transaction, businesses should obtain proper authorization from the customer's credit card issuer. This step will help to prevent chargebacks due to authorization errors.
Work with a third-party processor
Businesses can also limit the risks of chargeback fraud by working with a third-party processor. A third-party processor can provide additional security and fraud prevention tools, as well as assistance in dispute resolution. Third parties, like Seamless Chex, offer advanced technologies to mitigate the threat. With tools like:
- 3-D Security
- AVS/CVV matching
- Fraud risk scoring
- Velocity checking
Where to go for Chargeback Protection
It’s easy to become a victim of chargeback fraud. With Seamless Chex, you can breathe easy knowing that we have your back!
Seamless Chex specializes in chargeback prevention and can help your business reduce the risk of chargebacks.
We are chargeback prevention experts and can help you navigate the complicated world of chargebacks. Contact a Seamless Chex representative to learn how to best fight chargebacks today!