The Chargeback Fraud Survival Guide

Fraud + Chargebacks Fraud Prevention By Lisa Wirthman August 28, 2014

It’s sometimes called “friendly fraud,” but there’s nothing amiable about it: False chargeback claims cost businesses billions of dollars in losses each year. So-called friendly fraud occurs when a consumer buys an item online with his own credit card. After delivery, he claims the item was never received, making a chargeback request that cancels the transaction and refunds the consumer’s money. “Friendly fraud is more difficult to detect ahead of time because the rightful owner is the one making the purchase,” said Aaron Press, Director, Payments & eCommerce for LexisNexis.

For retailers, friendly fraud accounts for about one-fifth of fraud losses, according to Lexis-Nexis Risk Solutions, and the cost can be steep: They not only face the costs of replacing the lost merchandise but may also pay fees to financial institutions, and face increased overhead if they need to collect evidence to fight a claim.

Small businesses are generally hit hard by chargeback fraud. “We do know that small merchants invest less in fraud protection and are more likely to be defrauded because they have fewer ways to catch things in the process,” Press said. “And fraudsters know this.”

In fact, experts say only 54% of merchants take the proper steps to ensure that a chargeback is not fraudulent. So what are the most effective ways merchants can prevent chargeback fraud?

Know Your Customer

Great customer service can help prevent chargebacks by increasing customers’ confidence that your business will resolve any problems with their purchases, advises dispute-management firm Chargebacks 911. After all, a direct refund is less costly than a chargeback. Start by answering the phone or e-mails to deal directly with complaints: It’s a myth that most customers who file chargebacks don’t attempt to contact the merchant first, the company reports.

Verify Information

One common sense measure to prevent false chargebacks is to check “bill to” and “ship to” addresses on orders to see if they match, Press advised. Merchants should also be wary of shipping to freight companies that may forward merchandise overseas—a common chargeback setup, Chargebacks 911 advised. Merchants can also do their own due diligence by performing Google searches on shoppers’ names and addresses to verify that they are real.

Get an Autograph

Another easy way to prevent false chargebacks is to have customers sign for delivery of their merchandise, which makes it harder to claim that it was never received, Press said. Requiring customers to sign an electronic signature page after making online purchases also helps prove that customers are aware of the terms and conditions of their purchases, according to Chargebacks 911. Asking for and recording card security codes additionally helps to prove that a customer actually did authorize a transaction.

Keep Good Records

To help dispute false chargeback claims—and reduce overhead when filing disputes—keep detailed records for all customer transactions, including phone numbers, e-mail addresses, IP addresses, order forms, electronic signature pages, shipping and tracking information, and detailed notes of any correspondence, Chargebacks 911 advised. “In general, the stronger your paper trail, the more effective your dispute will be,” according to the company. Chargeback disputes also have time limits, so good record-keeping can also help merchants provide prompt replies to false claims before time runs out.

Know When to Seek Help

Last but not least, experts advise, trust your instincts. If something feels wrong about a transaction, don’t be afraid to follow up on it. And while common-sense measures can certainly help prevent false chargebacks, merchants should also know when to seek professional help, such as risk-management or dispute-mitigation services.

Ask yourself whether professional services will provide a return on your investment, Press advised. Start by examining your fraud rates: “Is fraud growing for you, and can you see a trend in which that’s trending upward?” he asked. Also evaluate how many orders you’re rejecting because you’re worried about possible fraud. “If you’re saying no to transactions that may be good, you’re turning away revenue and creating negative customer experiences,” Press added. “There’s a definite upside to being able to approve more transactions and satisfy more customers.”