Being the head of a business is for many people, the ultimate success. It means being self-sufficient, reliant only on yourself, and being your own boss. However, that enviable position also comes with serious potential challenges and complications that can get thrown into your path, and there won’t be a boss to bail you out and take care of everything for you because, well, you are the boss. One of these problems is chargeback fraud, an expensive, complex, and aggressive problem that comes in all shapes and sizes and can affect all sorts of merchants. To deal with it, you will need legal help as well, but more on that later. This article will help you understand what chargeback fraud is, the different types, and what you can do to prevent and defend yourself against it, so read on.
Table of Contents
The Basics
Let’s get down to brass tacks first and explain what chargeback fraud is. So, welcome to the crazy world of chargebacks, where the consumer becomes a self-serving outlaw and the hard-working merchant is forced to transform into a skilled detective. If you are a merchant, you may have heard how to mitigate friendly fraud, also known as first-party fraud, before, but be assured that it is anything but friendly, and here is how it can work. A customer buys something from you but then disputes the actual transaction, contacting their credit card company or bank to initiate said chargeback based on certain, specific reasons, like claiming the charge was fraudulent, the item was not as described or it never even arrived, etc. The bank will investigate this dispute and may then issue a refund to the purchaser, reversing the payment made to you, the merchant. You will then receive a notice of this chargeback and have two options; either to accept it or dispute it, for which you have about 30 to 45 days, depending on the issuing bank and the payment processor. This is known as chargeback recovery.
How It Works
By now, you can probably already tell how this system can be abused by nefarious customers who file false claims. As it is usually pretty apparent that the transaction was conducted by the rightful cardholder, a customer with malicious intent often relies on common chargeback reasons, like the item had never arrived, or INR, or the item significantly not as described, or SNAD, or their credit card having been used without authorization. Now, once the refund has been issued, the consumer keeps both the product and the money, and the merchant has only the loss. All too many merchants simply do not bother disputing a significant percentage of chargebacks, which then leaves about 15 billion dollars a year just unrecovered. Disputing the claim takes a lot of time and money, and especially if you do not have a lawyer who knows what to do and who to talk to, you might just lose the dispute anyway, as the typical unassisted win rate is a dismal one in five. Don’t let yourself be the majority here.
Fight Back
All that said, one mistake you absolutely should not make is not fighting back with all you have. Sure, you can and should not fight every chargeback claim, but it is worse to do completely nothing, so careful, close analysis of every chargeback claim is required to make sure that those that can be fought are actually fought. You have to try to recover as much of your money as possible, and if you do nothing, you are guaranteed to lose 100% of your profits, even though, in some cases, the amount of money you stand to win is pretty significant. In these scenarios, you should see it through with chargeback recovery.
Customer Service
If customers feel like their concerns can be quickly and easily resolved through your customer service department, they are less likely to initiate a chargeback. Effective, proactive customer service is too often overlooked as a method to both prevent and effectively represent chargebacks. If they do initiate one, try to directly contact the customer to figure out what the problem is and how you can assist them. Also, it is important to mention that their claim may be entirely legitimate, in which case you obviously should not dispute their claim, and instead understand what the issue was and how you can prevent it from happening again in the future. Open, clear communication and a willingness to improve your products and your service will not only help with the chargebacks and interactions with the customers but will also give you a good reputation in the long run, which will attract more customers.
Confirm Orders Before and After the Sale
One way to prevent chargeback fraud is to use active order confirmation, especially if you sell high-ticket merchandise, where you send the customer a confirmation email asking for an electronic signature before finalizing the purchase. So if they later try to say that they received something different than what was originally ordered, you will immediately have some evidence to dispute the claim. In the same vein, arrange to have an order confirmation email sent automatically to the buyer once the order has been placed. Not only will they appreciate it, but it will also provide a traceable record of the purchase and similar emails may be sent at other key stages of the purchase, creating a sort of “paper trail” of the whole transaction. To combat the “never arrived” chargebacks, make sure you use reliable, excellent shipping services that offer package tracking and delivery confirmation, require signatures for high-value items, and also monitor shipments. All these aspects will make it much more difficult for any customer with ill intent to initiate chargeback fraud.
Chargeback fraud is sadly a frustratingly common occurrence and an issue that many merchants often do not even bother disputing or investigating, losing a significant amount of money each year. However, if you have any reason to believe you may be the target of one, you should dispute the claim and investigate to see what is actually going on, and hopefully, you now have a few ideas on how.