A Handy Guide to Understanding Chargeback Frauds & How to Prevent It

Chargeback-related fraud has witnessed a tremendous surge with increasing digital adoption. It is also essential to understand that whether chargebacks are fraudulent or not, they come with a specific cost. According to a MasterCard report., chargeback costs surpassed $117.47 billion in 2023. These Chargeback costs can be damaging for businesses as they result in fraudsters obtaining the product or service for free or at a significantly reduced cost. 

However, merchants suffer financial losses. This underscores the necessity of implementing proactive chargeback management and fraud prevention strategies to protect your business interests.   

This guide This guide dives deep to provide a thorough understanding of how to prevent such costs, save time and money, and ensure your business is always protected.      

Chargeback fraud occurs when a customer makes a purchase using a credit card, receives the product or service as expected, but then falsely claims to their card issuer that the transaction was unauthorized or that they did not receive the goods or services.

According to the Fair Credit Billing Act, customers can claim refunds in circumstances like billing errors, wrongs, or deducting money when goods are delivered. However, some dishonest customers take undue advantage of this mechanism.  

The purpose of credit card chargebacks is to help customers get back their funds from the card issuer after their money gets wrongly deducted. However, the problem arises when customers misuse them to claim an illegitimate chargeback for a legitimate purchase. Merchants can fight back against the claim, but the process is tedious, and costs are often steep. As a result, merchants often tend to avoid disputes and opt out.  

For businesses, chargeback fraud can result in financial losses, a loss of reputation, and increased fees from payment processors. Therefore, they need to minimize the fraud. 

The Most Common Types of Chargeback Frauds

Here are some examples of chargeback fraud to help you understand the problem: 

1. Friendly Fraud

This occurs when a customer purchases a product online but later falsely claims they didn’t receive it. They then dispute the charge with their payment card issuer to obtain a refund. However, the truth is, they did receive the item and are attempting to avoid payment. 

2. Card Testing

Card testing is a more sophisticated way of detecting chargeback fraud. After stealing the credit card information, fraudsters make small purchases to validate the card details. If they find the information accurate, they make a big purchase and claim a chargeback. 

3. Exploiting Return Policies

In this scenario, scammers buy items from e-commerce stores, use them for special occasions, and then return them, citing dissatisfaction with the product. Despite having already used the item, the merchant is obliged to issue a refund.  

The Potential Targets of Chargeback Frauds 

With increasing digital adoption, chargeback fraud has become a headache for many consumer industries. Here are some of the particularly vulnerable businesses:  

• Online retailers are the most common targets for chargeback fraud, as it’s easier for customers to make purchases and then claim a chargeback. 
• Marketplaces and third-party platforms connect buyers and sellers, but sellers often have to bear the financial loss.  
• Customers easily deny downloading software or e-books but claim they didn’t receive work as promised. 
• Subscription-based services, like OTT platforms, have to bear the brunt of chargeback fraud. Customers may dispute the charge after canceling subscriptions.. 
• High-value or luxury goods businesses can fall victim to chargeback fraud. 

Authentic Chargeback Requests Vs Chargeback Fraud

Here are some ways to distinguish between authentic chargeback requests and chargeback fraud:

1. Review Transaction Details

Verify transaction details to confirm that the transaction ID, shipping address, and product description align with the claim. This helps you identify potential discrepancies, preventing potential fraud. 

For example: suppose a customer has filed a chargeback, but a simple cross-checking of the transaction ID, order ID, shipping address, and product description shows that the laptop was indeed delivered to the address. 

2. Validate Customer Claims

Just make a quick call to the customer to understand the reason for the chargeback. You can validate, in most cases, the veracity of the claims and resolve the dispute fairly.  

3. Verify Delivery and Fulfilment

Delivery should always be confirmed through proof of shipment to make sure the product was indeed delivered to the mentioned address.  

4. Check for Chargeback Patterns

Try to find out patterns, such as repeated claims of chargebacks or frequent refunds, to understand the red flags. A suspicious pattern can help identify fraudulent claims.  

5. Use Fraud Detection Tools

Employ fraud detection tools like Sensfrx to identify suspicious transactions and prevent chargeback fraud effectively. This can quickly and accurately identify fraudulent activities in many instances and prevent losses.  

Best Practices for Preventing Chargeback Fraud

Implement these 9 best practices to effectively combat and reduce chargeback fraud incidents.

1. Clear product descriptions and policies

Make sure your website carries detailed and accurate product descriptions, pricing information, refund policies, and replacement policies to reduce confusion in the minds of customers.  

How It Helps: This sets clear expectations and reduces the chances of disputes that may arise from confusing information.   

2. Secure payment processing

Use a strong chargeback fraud detection tool to prevent unauthorized, or suspicious payment transactions. 

How It Helps: It filters out potentially fraudulent orders, minimizing the risk of illegitimate chargebacks.  

3. Effective communication

Establish straightforward and clear communication with customers during the purchase and product delivery processes. In case of any issue or concern, immediately address them, as this reduces the probability of chargebacks. 

How It Helps: Open communication and prompt resolution can prevent minor issues from escalating into chargebacks.

4. Detailed record-keeping

Keep detailed records of all transactions, including order details, shipping information, and customer communications. This evidence can be invaluable when disputing chargebacks. 

How It Helps: Proper recordkeeping supports your case and boosts the chances of winning. 

5. Prompt delivery and tracking

Ensure timely delivery of products and provide customers with tracking information to verify receipts, reducing the potential for “item not received” chargebacks. 

How It Helps: Tracking deliveries and proof of receipt refutes false claims of non-delivery.  

6. Chargeback monitoring and analysis

Regularly monitor and analyze chargeback data to identify patterns and potential sources of friendly fraud, allowing you to take proactive measures. 

How It Helps: Identifying trends and addressing primary causes mitigates chargeback fraud risks.  

7. Fraud prevention tools

Invest in advanced fraud prevention tools that use machine learning and data analytics to detect and flag suspicious transactions or chargeback patterns. 

How It Helps: Proactively identify and block potentially fraudulent activities. 

8. Customer verification

Implement additional customer verification steps, such as requiring CVV codes, implementing two-factor authentication, or collecting additional information for high-risk orders. 

How It Helps: Verifying customer identities and order legitimacy can deter fraudsters, minimizing the probability of chargeback fraud. 

9. Maintain strong authentication 

Implementing measures like two-factor authentication, biometric verification, and advanced encryption methods to prevent unauthorized access by scammers.    

Sensfrx: Features and Functionalities 

Sensfrx relies on a strong cognitive engine to provide comprehensive protection against a wide spectrum of fraudulent activities. Its core mechanism encompasses the following:

Strong Encryption:

It protects sensitive user data and transactions utilizing its robust end-to-end encryption. This ensures data security even if unauthorized access is granted.

Device Fingerprinting:

Captures every information related to the device used by the fraudsters, such as the browser type, operating system, and IP address. For example, Sensfrx’s fast geolocation feature flags the device as unsafe when it observes that the same device has been used to make multiple registrations. Then, the system stops further registration on that device.

Intelligent Algorithm:

Tracks and monitors suspicious activities, including login patterns, access points, and transaction history,using its robust behavior analysis system, enabling the system to quickly detect and alert suspicious activities.

Dynamic Risk Scoring:

Evaluates transactions in real-time using multiple factors such as user behavior, device information, and transaction history, helping businesses make informed decisions.

Validators for Fraud:

Quickly identifies the “friendly fraud” instances, reducing the number of fraudulent chargebacks.

Intelligent Fraud Detection:

Sensfrx leverages smart machine learning algorithms to evaluate real-time data and quickly identify if there is any suspicious pattern, such as someone making sneaky attempts for account takeovers, shady transactions, or fake registrations.

Friendly Frauds:

If the email used for registration is from a temporary or disposable source, Sensfrx can identify it quickly and flag the email as disposable.

Customizable Fraud Policies:

Instead of a one-size-fits-all approach, Sensfrx lets security teams create tailored fraud validation rules and policies based on crucial factors, such as merchant country, billing country, transaction amount, and many more.

Automated Fraud Mitigation:

Powered by automated tools and workflows, Sensfrx can easily handle fraud mitigation attempts, saving a lot of productive time for businesses.

Real-time Unmasking:

Sensfrx’s cognitive risk engine takes just 250 milliseconds on average to make a decision. This real-time, efficient, and reliable fraud detection ensures you stay one step ahead of fraudsters, safeguarding their operations and customers.

How Sensfrx Protects from Chargeback Frauds 

Sensfrx employs advanced monitoring and detection techniques to identify suspicious transactions in real-time, which include the following: 

• If someone creates a new account using the same login credentials (username, email, and password), its intelligent algorithm can easily flag it as suspicious behavior.
• When a new account is opened using the same parameters, such as username, email, and password, as an existing one that has been inactive for a long period, Sensfrx identifies this and flags it as unsafe.
• If the email used for registration has multiple registration fail attempts, Sensfrx immediately sends an alert.
• If the phone number provided during registration is from a temporary or disposable service, Sensfrx will detect this and flag the phone number as disposable.

Closing Remarks 

Finally, it is essential to understand chargebacks are akin to digital shoplifting. This has become a cultural problem. The focus of businesses is now making things easier for customers, but they also need to stay ahead with their smart tech to spot those who are looking to take undue advantage. They need to leverage advanced fraud detection tools to outsmart fraudsters looking to steal hard-earned profits. If you’re looking for a reliable tool to manage chargebacks and frauds. Book a demo to see Sensfrx’s powerful chargeback fraud prevention tool in action.