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15 Best Practices to Prevent eCommerce Chargeback Fraud

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Retailers need to take a strong chargeback fraud prevention strategy to help stop fraudsters.
man looking at phone with credit card

Protecting Your eCommerce Business Against Friendly Fraud

Retailers need a strong chargeback fraud prevention strategy and robust eCommerce fraud protection to help stop fraudsters.

Understanding Chargeback Fraud

Chargeback fraud—also known as friendly fraud—is one of the most common types of eCommerce fraud, especially in card-not-present transactions. It occurs when a customer disputes a legitimate transaction with their bank or card issuer rather than with the retailer to obtain a refund while still keeping the merchandise. Legitimate chargebacks happen when a customer believes the charges are authentically fraudulent.

The Chargeback Process

The chargeback process is complex and involves multiple players, including:

  • The cardholder who makes the purchase and disputes the charges

  • The merchant where the transaction took place

  • The bank that issued the credit card to the cardholder

  • The acquiring bank that is responsible for obtaining payment on the merchant’s behalf

  • The card network such as Visa, Mastercard, Discover, and American Express

The process involves extensive decision-making and numerous steps and operates under a strict timeline as it progresses. A chargeback is only issued if the issuing bank completes an investigation and determines its validity. Merchants can then dispute the legitimacy of chargeback requests.

Customers typically file a chargeback request when they suspect fraudulent transactions on their credit card statement or if they receive a fraud alert from the network after credit card payments. These types of honest mistakes can be prevented by ensuring the merchant or a descriptor is clearly identified on the credit card statement. However, issuing banks typically only have the customer’s word as evidence of fraudulent charges, and given that banks rightfully want to protect their customer experience, they tend to believe their customers’ claims without any factual evidence.

Many merchants write off chargeback fraud as an additional operational cost of doing business because of how complex the process is and the reality that the costs of managing a large number of chargebacks internally could exceed the actual monetary loss from fraud. However, high chargeback rates and associated chargeback fees eat away at revenue, and significant amounts of it can create a loss of trust in issuing banks and card networks, affecting your merchant account while resulting in processing fees that eat into revenue and profitability.

Best Practices to Prevent eCommerce Chargeback Fraud

Merchant fraud protection requires recognizing and blocking bad actors from intentionally and maliciously committing fraud. It occurs post-purchase and requires a different approach than other fraud detection methods.

While there is no way to eliminate all eCommerce fraud, retailers and brands can prevent a significant amount of it by identifying fraudulent signals and taking steps to thwart them as often as possible. It is also about not letting the signals go uncontested and disputing invalid chargeback claims quickly and efficiently. The following are illegitimate chargeback prevention practices that eCommerce retailers can and should implement to stay ahead of the latest eCommerce fraud trends.

  1. Maintain accurate product descriptions. Ensure product descriptions and images accurately represent the items you sell. Avoid using stock photos or misleading descriptions to prevent customer dissatisfaction.

  2. Use a recognizable business name. Use a name or descriptor on customers’ billing statements that’s easily recognizable and matches your website’s name. This minimizes confusion and reduces the likelihood of chargebacks due to unrecognized charges.

  3. Set purchase limits. Establish purchase limits for new or high-risk customers until you can verify their identity or payment information. Gradually increase this amount as trust is established.

  4. Implement a multi-factor authentication (MFA) system. Utilize MFA authentication during the checkout process to add an extra layer of security. This can include SMS verification, email confirmation, or one-time passwords (OTP). MFA makes it more challenging for fraudsters to use stolen credit card information to complete a purchase, as they would need access to the cardholder’s additional authentication methods.

  5. Collaborate with payment processors. Work closely with your payment processor to identify and prevent chargeback fraud. Some processors offer chargeback protection services.

  6. Validate cardholders with authentication. Use card network prevention tools such as address verification service (AVS), card security codes (CVV), 3-D Secure 2.0 (3DS2), and a real-time account updater feature such as Visa Account Updater (VAU). Using several of these authentication tools increases accuracy.

  7. Use available tools and check reason codes. Card networks have automated response programs that work in real-time to resolve inquiries, clear up cardholder confusion, and reduce fraud. Chargebacks are assigned reason codes that indicate why the chargeback was issued. Tracking reason codes can help retailers understand why chargebacks are happening.

  8. Communicate clearly with customers. The more engaged a retailer is in communicating with customers at every step of the buying process, the harder it is for customers to dispute policies or card transactions. Make return policies simple, clear, and obvious to customers, and have customers click a checkbox to confirm they have legally agreed to your terms at checkout. Provide easy-to-find contact information for customers to easily communicate with the retailer through chat, email, phone, or another channel.

  9. Look for red flags and create a traceable record. Often, fraudsters rapidly purchase high quantities of items, high ticket products, or multiples of the same product with the intent of committing chargeback fraud. Retailers can build verification methods to build proof that the cardholder authorized the purchase, understand the purchasing habits of their customer, and send order confirmation immediately after purchase and at other key stages to create an audit trail.

  10. Track your customer order. Communicate clearly at each step of the order journey—from the moment the order ships to the time it is delivered. Fraudsters cannot claim a package was not delivered if you track and confirm order delivery with your carriers and/or require signed delivery confirmation.

  11. Negative list of known offenders. Cyber shoplifters will typically reoffend. Retailers can block bad actors with a negative list that denies them from making future purchases.

  12. Send reminders. Customers who receive notifications of upcoming subscription renewals will have difficulty requesting a chargeback. Use a real-time account updater to accurately capture payments.

  13. Challenge invalid disputes. In addition to costing revenue, letting chargebacks go undisputed can make retailers seem guilty. Challenging disputes need to be conducted within a certain timeframe and include compelling evidence, which can be difficult for retailers battling fraud alone.

  14. Improve customer service. Customers with legitimate purchases and true reasons for requesting a chargeback often feel that the retailer’s customer service was too difficult or unable to help them. Customer service staff should be trained to identify types of chargeback reasons and listen empathically to potential authentic chargeback requests, such as having a family member or child purchase something without the cardholder’s permission, stolen credit card concerns, and buyer’s remorse or change of mind. All of these issues can be addressed through a return policy that prevents customers from having to go to their bank to pursue a refund.

  15. Use humans to make judgment calls. Customer service and contact centers deploying AI virtual agents need to be mindful that only humans have the intuitive, empathic, and discerning ability to make judgment calls about a customer’s request for a refund or chargeback that is outside the normal scope of the return policy.

The bottom line is that eCommerce retailers need a strong prevention and deterrence strategy. The best way to accomplish this is to create as much of a record as possible of each transaction, requiring the customer to opt-in or validate steps in the purchasing process and to dispute invalid chargebacks. Understanding the latest eCommerce fraud statistics is crucial for staying informed and proactive.

retailers in shop on phone using laptop

Why Retailers Need Chargeback Management Support

There is only so much retailers can do to prevent chargeback fraud. Most eCommerce retailers need chargeback protection support by subject matter experts who will handle the complex work of monitoring and disputing fraudulent chargebacks on their behalf.

Radial offers chargeback management that helps protect eCommerce retailers. Our cutting-edge chargeback dispute process uses machine learning to enable retailers to focus on their business while eliminating the need for a specialized team to handle chargeback claims. Radial experts do the heavy lifting for end-to-end chargeback management so retailers can concentrate on serving customers. 

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Radial can help with chargeback fraud.