What is Chargeback Fraud and How to Prevent It

Merchants often have to deal with chargeback fraud. The primary purpose of risk analysis is to detect and prevent false chargeback operations. The ability to discover the details behind a chargeback scam is invaluable for merchants. This involves discovering whether a suspicious order was placed by a legitimate authorized cardholder or a fraudster who used stolen cardholder information.

By definition, payment fraud is criminal deception meant to bring personal or financial gain to the fraudster. Fraud is very easy to comprehend on its own, but when paired with words like friendly, true, and chargeback, it takes on a whole new meaning, especially for merchants.

Chargeback Fraud Defined

When a cardholder disputes a transaction with their bank or credit card company instead of resolving a refund with the merchant with the intent to get something for free, they’re committing chargeback fraud. Also known as friendly fraud, it represents a way of abusing the chargeback process to obtain a secure refund without notifying the merchant.

Despite the numerous and often creative excuses, statistics say that dishonest chargeback claims are constantly on the rise. 

There are many reasons for a fraudulent chargeback. Some of the most common include:

• The cardholder was hoping to get something for free
• The cardholder didn’t understand the purchasing process
• The cardholder regrets ordering the product or service but doesn’t want to inform the merchant about it
• A family member (family fraud) used the cardholder’s information to purchase something without notifying the cardholder

Deep Dive into Chargeback Fraud

Friendly fraud and chargeback fraud, which we will use interchangeably going forward, are a type of chargeback most merchants face. When a cardholder expresses friendly fraud concerns and files for a dispute, it’s important to consider various types of fraud, including:

1. Actual fraud: When a fraudster uses another cardholder’s information to purchase an item. Then the merchant unknowingly sends the item to the fraudster.
2. Friendly/Chargeback fraud: Friendly fraud is a type of fraud that occurs when cardholders dispute legitimate purchases. For instance, a family member purchases items without notifying the authorized cardholder, or when the purchaser themselves want something for free.
3. Merchant error or negligence: This happens when the merchant fails to ship the order, ships a damaged item, or refuses to provide quality customer service (a refund or store credit). Therefore, the chargeback falls under merchant error or negligence.

The Challenges of Fighting Friendly Fraud

Now that you know what friendly fraud is, you should also know it is difficult to combat.

Banks assign predefined codes to disputes based on the customer’s reason for a chargeback. Very often, merchants simply accept the reason code as legitimate and fail to investigate the truth. This can be due to limited resources to contest chargebacks to begin with or compounded by a buyer’s insistence they should be refunded for a given charge.

Sadly, chargeback acceptance without proof leaves the merchant defenseless against this form of fraudulent activity. Ironically, fraud chargebacks are often submitted by regular or trusted customers so the merchant never suspects their customer is lying.

False chargebacks are also on the rise because chargeback regulations were set before the Internet era. This means these regulations have yet to adapt to today’s Internet-based marketplace. Prosecutors also often don’t have the political will or resources to deal with this crime.

Because it is so hard to fight fraud, it’s important to stop this crime before it even happens. Sift offers comprehensive fraud prevention products to keep your business safe.

How to Prevent Chargeback Fraud

Reducing fraud is an absolute necessity for merchants. But before you try to fight fraud, you should first make sure your business is as close to being chargeback-proof as possible. Familiarize yourself with the minor mistakes or missteps that may encourage chargeback fraud.

The most effective way to prevent fraud is to utilize a platform that allows you to manage everything about fraud detection in one place. Sift is the leader in Digital Trust & Safety. Our solutions effectively and proactively combat online fraud and abuse. Through fraud detection and prevention, we streamline operations and drive revenue growth.

To learn more about the ways we prevent fraud and chargeback operations, check out these recent posts:

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