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Best Practices to Prevent eCommerce Chargeback Fraud

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

By Michael Habermann, Director of Fraud Services, Radial

Retailers need to take a strong chargeback fraud prevention strategy to help stop fraudsters. Chargeback fraud—also known as friendly fraud—is a type of fraud where 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. However, the chargeback process is complex and involves multiple players including:

  • The cardholder that 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, Discovery, and American Express

The chargeback process involves extensive decision making and numerous steps, and it operates under a strict timeline as it progresses. Chargebacks are not issued unless the issuing bank completes an investigation and determines a chargeback is valid. Merchants can 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 card network. These types of mistakes can be prevented by making sure the merchant 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. This results in merchants losing revenue and negatively impacts profitability.

Many merchants write off chargeback fraud as a cost of doing business because of how complex the process is and the reality that the costs of managing chargeback fraud internally could exceed the actual monetary loss from fraud. However, chargeback fraud eats away at revenue and significant amounts of it can create loss of trust in issuing banks and card networks. High rates of chargeback fraud make eCommerce retailers seem untrustworthy, which can damage their reputation among customers and financial institutions.

Best Practices to Prevent Chargeback Fraud

Preventing chargeback fraud 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 in a quick and efficient manner. The following are chargeback fraud prevention practices that eCommerce retailers can and should implement:

  1. 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.

  2. 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.

  3. 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 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.

  4. Look for red flags and create a traceable record. Oftentimes, 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.

  5. 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.

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

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

  8. Challenge invalid disputes. In addition to costing revenue, letting chargebacks go undisputed can make retailers seem guilty. Challenging disputes needs to be conducted within a certain timeframe, which can be difficult for retailers battling fraud on their own.

  9. Improve customer service. Customers that have 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 permission of the cardholder, 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.

  10. Use humans to make judgment calls. Customer service and contact centers that are 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.

Why Retailers Need Chargeback Management Support

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

Radial offers chargeback management that helps protect eCommerce retailers. Our cutting-edge chargeback dispute management process enables 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. 

Learn more about preventing chargeback fraud by speaking with one of Radial’s experts today.