Chargeback Fraud: 5 Signs Your Business is at Risk

Regardless of how chargebacks happen, it takes retailers an average of 1.8 hours per dispute to resolve, and fees levied by the credit card provider or bank can reach up to $100 per transaction. According to ClearlyPayments, 34% of chargebacks are deemed fraudulent.

To get ahead of chargebacks and prevent them from happening in the first place, read 5 Ways to Prevent Chargebacks. If you’re noticing a rise in chargebacks, keep reading. In this article, we share five signs that the chargebacks you’re getting hit with are likely fraudulent. If you notice any of these happening, it’s worthwhile to run deeper analyses to understand how many fraudsters are initiating chargebacks through the following methods so you can take action and prevent chargeback fraud.

Some customers may initiate chargebacks because they’re unsure how to contact the merchant for a refund. If you’ve noticed a rise in chargebacks, test the customer experience, from first touch on your website to product delivery, to identify how clear or unclear it is for them to reach out with questions or concerns. Make sure the path to refund is crystal clear to shoppers and that they’re presented with multiple opportunities to contact your support team, as well as responding promptly when customers do contact you to resolve a concern.

If a refund request has been denied, customers may initiate a chargeback because they feel entitled or frustrated. In other cases, customers may not contact the merchant at all. Review customer details and communications to determine if they requested a refund. If they haven’t or were denied, it could be a sign that the chargeback is fraudulent.

If a customer initiates a chargeback, make sure the item has been delivered and that you have proof of delivery. If you see that a customer has initiated a chargeback before they’ve received the item or filed an item not received (INR) claim, it’s likely a sign of chargeback fraud.

Similarly, a scammer might attempt to work directly with the merchant to collect a refund before an item arrives. They might employ pressure tactics and use their attempt of working directly with the merchant as a way to make the merchant believe they are a legitimate shopper. Never issue a refund before goods are delivered. Always make sure to maintain thorough records of all transactions that include proof of delivery confirmation, such as a tracking number, photo, or digital signature showing successful delivery.

A double refund chargeback happens when a customer asks for a refund for a transaction and then files a chargeback for the same purchase. The merchant refunds the charge as requested, but is unaware that the customer intends to dispute the charge again with their bank or credit card issuer and receive their money back twice.

While some customers may preemptively initiate a chargeback if they don’t receive a timely refund, others may try to scam merchants into providing a double refund. Keep thorough transaction details to prove you initiated a refund that can be used in chargeback representment. If a customer has started the chargeback process before you’ve issued a refund, work closely with the credit card or bank to ensure you don’t accidentally double refund the customer.

Customers who engage in chargeback fraud may not attempt to resolve issues directly with the merchant through customer support. Instead, they may immediately dispute the transaction with their bank or credit card company. If a shopper has initiated a chargeback and ignores any attempts by your company to resolve this directly, it’s highly suspicious and likely chargeback fraud. Be sure to document contact attempts to help you win your case in chargeback representment.

When investigating each chargeback, look at the transaction history for chargeback volume. If you notice a pattern of multiple chargebacks from the same customer within a short period or a higher-than-average chargeback ratio, it’s likely chargeback fraud. Unfortunately, customers and professional fraudsters can become susceptible to taking advantage of the chargeback process because credit card issuers and banks make it easy for them to initiate and win.

If you’re noticing a rise in chargeback fraud, NoFraud can help prevent it from happening in the first place. Chargeback fraudsters often become repeat offenders and can be challenging to block as they create new identities. Here’s how the NoFraud Platform keeps your shop safe:

Shopper Network + Third-Party Data = Blocks Fraud

Our dynamic decision engine is the backbone of the entire NoFraud Platform. We use powerful algorithms to combine data from our vast merchant shopper network of thousands of eCommerce businesses and third-party sources to flag high-risk orders for further review or block them altogether. Over 99.5% of pass/fail decisions are made instantaneously, so your business keeps running smoothly.

Real-Time Authentication Tactics for Suspicious Orders

To maximize approval rates, NoFraud can take steps to verify the purchaser’s identity in real-time for the highest-risk transactions. These steps can include verification by email, text, and phone. Any emails sent can be customized to include your email domain and branding.

Block High-Risk Customers

The blocklist is a tool merchants can use to automatically reject transactions from specific customers, ensuring they receive a NoFraud response of “fail.” This discretionary measure allows store owners to block individuals who frequently purchase and return items, or those who have left negative reviews, from shopping at their store. To add someone to the blocklist, merchants can use identifying information such as email or phone number, effectively preventing these customers from completing future transactions.

Chargeback thresholds refer to the predefined limits set by payment processors or acquiring banks that determine when a merchant may face consequences due to excessive chargebacks. These thresholds are in place to monitor and manage the level of chargebacks a merchant experiences, as high chargeback rates can have negative consequences for both the merchant and the payment processor.

Typically, chargeback thresholds are expressed as a percentage of the total transactions or as a specific number of chargebacks within a certain period. If a merchant exceeds these thresholds, they may face various consequences, such as:

• Fees: Merchants exceeding chargeback thresholds may be subject to additional fees imposed by their payment processor or acquiring bank.
• Monitoring programs: Payment processors may place merchants with high chargeback rates into monitoring programs, where their transactions are closely scrutinized. Typically, these programs are broken down into tiers like “early warning,” “standard,” and “excessive.” As merchants progress through the tiers, their fees increase, and consequences become more severe.
• Termination of services: In extreme cases, if a merchant consistently exceeds chargeback thresholds, the payment processor may terminate their services, making it difficult for the merchant to process payments.

Merchants must be aware of and adhere to the chargeback thresholds set by their payment processors. Merchants can often find information about chargeback thresholds in their agreements with the payment processor or by contacting the payment processor directly. Monitoring chargeback rates, addressing customer concerns promptly, and implementing measures to reduce chargebacks are crucial for maintaining a healthy merchant account.