Stop scammers in their tracks – how to recognize chargeback abuse

A guest blog by Jessica Perkins

Chargeback abuse and fraud have been on the up and up since online shopping became a trend. According to Chargebacks911’s 2021 Report, an estimated 409 million chargebacks may be filed in the US in 2023, which will cause chargeback costs to soar to $117.47 billion globally.

If you want to avoid losing a whopping $360 in fees for every $100 your customer spends, you need to be able to recognize chargeback abuse. While some chargebacks are intentional, others are harder to spot and even harder to prevent, so your business must stay diligent.

Why chargeback fraud is difficult to identify

Chargeback abuse lies in a gray area, but there are ways to spot it, so you can prevent abuse in the future.

Merchants have little ability to push back

When customers ask for a chargeback, they have to enter a predefined reason code to back up the dispute. As banks often favor the customer in a chargeback dispute, banks will sign off on a chargeback, even if it’s fraudulent. Unfortunately, banks rarely challenge repeat offenders.

Cardholders see chargebacks as easy

That same Chargebacks911 report found that 81% of all cardholders have filled a chargeback out of convenience. Not only that, but many of your customers may mistake chargebacks for refunds. Customers may go to the bank immediately because they’re guaranteed a “refund.”

Chargeback regulations are obsolete

Chargeback regulations were created in a pre-internet era, making the majority of its rules obsolete or heavily skewed in the customer’s favor. Merchants consider it easier to let a charge go through, even when they have evidence of the crime because it’s more expensive to fight it.

Where does chargeback abuse come from?

Criminal fraud, friendly fraud, and merchant error are the three main sources of chargeback fraud. You can detect these sources by using technology, prior planning, and refund policies.

How to recognize criminal fraud

Criminal fraud is often the least common source type, but they happen more often than you think. According to a report conducted by ACI, the fraud average ticket price was $174 in 2020, which was double the price of genuine purchases at $87 per ticket that same year.

If you were a travel agency and the bank issued a chargeback from a criminal fraud for tickets, you likely won’t pay a fee, and your chargeback-to-transaction ratio won’t be affected.

However, you may pay for the cost of the ticket out-of-pocket. There’s also no guarantee your bank will recognize criminal fraud when it happens, even though it’s the easiest to prove.

Here are some common examples of criminal fraud chargebacks:

• Account hacking or a full account takeover
• Clean fraud (bypassing fraud detectors)
• Synthetic fraud or identity theft fraud
• Fast fraud (maxing out credit cards)
• Business email fraud or phishing schemes
• Affiliate fraud (stealing submitted card information)

The best way to identify criminal fraud is with technology. Software like Bolt and Kount are fraud prevention solutions that can defend against several fraud abuse claims, like fake accounts.

How to recognize friendly fraud

Friendly fraud prevention is nearly impossible because loopholes in chargeback regulations encourage this behavior. It also doesn’t help that friendly fraud isn’t classified as illegal, even though the customer is deliberately or accidentally filing a chargeback on a legitimate purchase.

However, friendly fraud is very easy to recognize, albeit very difficult to prove to banks.

If the customer is using their own identity and account to file a chargeback on a purchase they aren’t supposed to (due to policies or US law), you can guarantee their friendly fraud isn’t so friendly. To top it off, friendly fraud can happen at any time and occurs more frequently online.

Here are some reasons why customers commit friendly fraud:

• They don’t recognize the business
• They forgot about the purchase
• They forget to cancel a recurring payment
• They think a chargeback and refund are the same
• They don’t want to wait one to five days for a refund
• They spoke to the bank, and the bank issued a chargeback without their consent
• They feel buyer’s remorse after a purchase
• They experienced family fraud (a family member made a purchase without their consent)
• They felt a chargeback was more convenience
• They cyber shoplift (bought an item with no intention to pay for it)

To reduce friendly fraud, consider upgrading your return policy or liability waivers right away.

How to recognize merchant errors

While criminal fraud is simple to prove, merchant errors are the easiest to prevent.

At the same time, you may not know if a chargeback abuse occurred because your policy is lackluster or your customer service is sub-par. You’ll need a business audit to know for sure.

If criminal fraud occurred due to a merchant error, it’s likely the criminal is taking advantage of your non-existent policy. If friendly fraud was committed from a merchant error, your customer may not know where to find your refund policy or who to ask for help when problems arise.

Here are the main reasons why merchant error chargebacks happen:

• Poorly written return policies
• Lack of customer service
• Ignoring negative reviews or complaints
• Little to no shipping policy
• No updates on package location
• Missing delivery confirmation
• Inaccurate product descriptions
• Confusing card or bill descriptors
• Extra fees after a shipment
• Disorganized filing system

While there isn’t a consistent way to recognize merchant errors that involve fraud, fraudulent claims will reduce as soon as you rework your policies. However, it can be hard to recognize our own errors, so if you need extra help, consult a lawyer or your in-house HR professional.

How can Rezdy help prevent chargeback abuse?

Rezdy is an online booking platform with a stress-free booking software that turns your site into an always-on sales channel. With an integrated payment processing solution and an easy-to-customize automated guest communications tab, you’re in for a hassle-free experience.

But that ease-of-use isn’t limited to you and your team; it’s passed on to your customers. Simple things, like a “Book Now” button, make it easy for your customers to buy from you, book meetings, and so much more. Plus, your customers will know full well what they’re buying.

And that’s not all. Since you’re spending less time on tedious tasks, you’ll have more room to focus on your customers. Creating a memorable client experience has never been so simple.

Rezdy provides users with access to a range of our other features that can help prevent chargeback abuse, like our mobile management app and payment gateway fee comparison tools that help to ensure you choose a secure gateway that protects you and your customers.

Curious to see how Rezdy can fit within your business? Start a FREE 21-day trial or book a demo today.

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