How to Protect Your Business from Chargeback Claims - COREDO

How to Protect Your Business from Chargeback Claims

Updated: 29.06.2023

If you are encountering difficulties in mitigating false transaction claims, there are various approaches that you can employ to prevent such fraudulent activities and safeguard your enterprise. In the following passages, we will outline some of these methods, which can be instrumental in curtailing such occurrences and protecting the financial integrity of your business.

Chargebacks can have a detrimental impact on businesses, resulting in expensive fees, lost shipping revenue, transaction processing costs, and valuable time spent resolving disputes.

In addition, a high volume of chargebacks can potentially inflict reputational harm on a company or even prompt the termination of a merchant account. This comprehensive guide aims to equip businesses with the knowledge and tools necessary to effectively manage and mitigate the negative consequences of chargebacks.

What are chargebacks?

Chargebacks, which are also commonly referred to as “disputed transactions,” occur when customers dispute credit card charges and request refunds. Such disputes may arise from a range of factors, such as a genuine mistake on the part of the user or fraudulent activity by individuals seeking to manipulate the system for their benefit. In either case, chargebacks can result in significant financial losses for businesses, which underscores the importance of developing effective strategies for preventing and managing them.

There are three primary types of chargebacks that businesses may encounter:

  1. Criminal fraud chargebacks stem from transactions made using stolen credit card information. In these cases, the actual cardholder initiates a chargeback claim after discovering unauthorised charges on their account.
  2. Company error chargebacks result from mistakes a business makes during the transaction process. This may include errors such as incorrect transaction amounts or billing errors.
  3. Friendly fraud chargebacks occur when a cardholder falsely claims that a transaction was fraudulent despite having made the purchase themselves. For instance, an individual may purchase an iPhone 14 on Amazon, receive the product, and then falsely claim that they did not authorise the transaction.

All businesses are vulnerable to these three chargeback types, which can lead to costly fees and significant time spent resolving disputes. Therefore, companies must take proactive measures to prevent and manage these risks.

What is chargeback fraud and how does it impact businesses?

Chargeback fraud occurs when a customer intentionally provides false information about the status of a purchase, usually to obtain a refund while retaining the purchased item. Common tactics used by fraudulent customers include falsely claiming that they never received the order or that they did not authorise the transaction. This type of fraud can be highly detrimental to businesses, resulting in financial losses and damaging the company’s reputation. As such, businesses must remain vigilant and implement effective measures to prevent and mitigate the risk of chargeback fraud.

How to protect your business from chargeback claimsThe impact of chargeback claims on eCommerce businesses is significant and cannot be ignored. The number of such claims has recently increased exponentially, a trend that the COVID-19 pandemic has exacerbated.

Reports indicate that in 2021, as many as 75% of eCommerce companies experienced a surge in fraud attempts. This clearly indicates the growing risk that businesses face in this regard. Looking ahead, it is estimated that merchants will be confronted with chargeback claims worth as much as $100 billion by 2023. These figures underscore the need for businesses to take proactive steps to protect themselves from fraudulent chargeback claims and to implement robust strategies to manage such risks.

Businesses that experience chargeback claims are often required to pay a significantly higher price than just the cost of the disputed product. Including additional hidden expenses means that businesses may have to pay up to four times the product’s original price.

Looking ahead to 2023, the average cost of a single chargeback claim is estimated to rise to $190. This includes various expenses such as fees charged by credit card issuers and payment processors and costs associated with the investigation and resolution of the claim. The financial impact of chargeback claims on businesses is significant, and companies must take appropriate measures to minimise such costs and protect their bottom line.

In addition to its financial impacts, chargeback claims can also result in significant reputational damage for businesses.

Suppose payment processors observe a high ratio of chargebacks. In that case, they may mitigate risk, such as limiting the merchant’s monthly payment volume, terminating their account, or placing them on a Terminated Merchant File (TMF) list, identifying them as high-risk customers. Being placed on a TMF list can have serious consequences for a business, as it may force them to work with high-risk payment processors or even create a new legal entity to continue operations. This can be time-consuming and expensive and may damage the company’s reputation, resulting in a loss of customer trust. It is, therefore, essential for businesses to implement effective strategies to prevent chargeback claims and protect their reputation.

How to mitigate chargebacks?

Given the complexity of chargeback claims, businesses must use various tools to combat them effectively. Below, we outline the four primary methodologies that businesses can take to address this problem:

METHOD #1: Manual Process of Verifying payment method

To ensure that the customer making the payment is the legitimate owner of the payment card and prevent fraudulent activities such as using stolen cards to make multiple transactions, a selfie with the bank card is required from the customer when making their first payment. This procedure involves taking a picture of the customer holding the payment card, which allows for the verification of the customer’s identity and the authenticity of the payment card being used. By implementing this measure, businesses can reduce the risk of chargeback claims resulting from fraudulent transactions and provide customers a secure and trustworthy payment environment.

Despite the benefits of requiring a selfie with the bank card when making a payment, this method has limitations as it relies on humans to determine the authenticity of the payment card and the customer’s identity.

There is always the risk of human error or the possibility that a sophisticated fraudster may be able to deceive the verification process. Furthermore, this additional verification step can slow down payment processing as it requires transaction managers to manually review and verify each suspicious payment, which can result in delays and inconvenience for customers.

As such, businesses need to weigh the benefits and limitations of this verification method and consider implementing additional measures, such as using automated fraud detection software, to enhance the security and efficiency of their payment processing.

While requiring a selfie with a bank card can be effective for small companies processing a limited number of transactions, it may not be a viable option for large corporations that process thousands of transactions daily. The manual verification of every customer’s identity and payment card ownership would be impractical and time-consuming, leading to significant delays and potential errors.

Furthermore, the cost of implementing such a manual verification process can be prohibitive, requiring a larger workforce to carry out the checks and resulting in significant expenses for the company. Companies with a high volume of transactions should consider implementing automated fraud detection and prevention systems that can efficiently identify and prevent fraudulent transactions while minimising the risk of chargeback claims and reputational damage.

METHOD #2: Automated Review Process

Automated chargeback reviews can be an effective way to prevent fraudulent chargeback claims. By requiring users to pass a Know Your Transaction (KYT) procedure, companies can detect suspicious transactions by identifying unusual patterns, dubious transfers, and transactions made in digital or fiat currencies. An automated KYT solution can streamline this process by using advanced algorithms and machine learning to identify potential fraud more efficiently and accurately than manual reviews. This can save companies time and money and reduce the risk of chargeback claims and reputational damage.

Automated KYT solutions can also provide real-time monitoring of transactions, which can help companies identify and prevent fraudulent activity before it leads to a chargeback claim.

Using KYT solutions can help companies detect various criminal activities beyond chargebacks, including money laundering, terrorist financing, fraud, identity theft, drug trafficking, corruption, and bribery. By monitoring transactions for unusual patterns and suspicious activity, companies can identify potential criminal behaviour and take action to prevent it. In addition to protecting their business, implementing KYT solutions can help companies comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations, which are required by law in many jurisdictions.

Automated KYT solutions are designed to detect abnormal patterns in customer transactions. These patterns can include:

  1. Transactions with Unusual Amounts
  2. Transactions with Unusual series,
  3. Transactions with unusual destinations or origin of a payment,
  4. Transactions with known threats or typologies.

By analysing large amounts of data and using advanced algorithms, automated KYT solutions can quickly and accurately identify potentially fraudulent or criminal activity, allowing businesses to take action to prevent losses and protect themselves and their customers.

How to protect your business from chargeback claimsIn addition to the above-mentioned suspicious patterns, automated KYT solutions may also detect other anomalies, such as:

  1. Transactions made from high-risk countries or regions
  2. Transactions that involve high-risk industries or products
  3. Transactions that fall outside the usual time or location patterns of a customer’s typical behaviour
  4. Transactions made using compromised or stolen payment credentials
  5. Transactions that are split into multiple smaller amounts to avoid detection
  6. Transactions that involve customers with a history of fraud or chargebacks.

METHOD #3: Data and Pattern Analysis

To authenticate the accuracy of personal information, businesses may resort to utilising the practice of big data analysis to identify and deter any potential fraudulent attempts.

This approach involves utilising a diverse range of tools to systematically collect data from checkout flows, card networks, and bank records to detect any anomalies and predict the likelihood of fraudulent activity.

Typically, such data can be accessed via various databases that specialise in tracking fraudulent behaviour, which may be hosted locally, thus mitigating any potential network delays and enabling the integration of such tools into a company’s existing workflow. By leveraging this method, businesses can enhance their ability to identify instances of chargeback fraud expeditiously.

  • IP geolocation and device location 

By leveraging the data generated by a device’s IP address, or other location-based information, it is possible to accurately identify the geographic location where a given purchase was made and identify any anomalous patterns or behaviours. This information can be utilised to enhance compliance efforts by enabling the exclusion of IP addresses identified as belonging to proxies, concealed users, or other types of anonymisers. This approach helps to ensure the data’s accuracy and integrity, which is a key factor in maintaining effective compliance practices.

  • Device fingerprinting

An analysis of a device’s distinct attributes, such as its operating system, web browser type and version, language settings, and IP address, can accurately identify the device in question. This unique device, “fingerprint”, is a crucial tool in identifying and flagging repeat fraudulent requests, providing concrete evidence that the requests in question originate from the same device. This information can be leveraged to enhance the accuracy and efficacy of fraud detection efforts, allowing for more targeted and effective responses to instances of fraudulent activity.

  • Negative database 

Conduct checks on the history of cardholders to determine if they have a previous record of engaging in fraudulent behaviour. To this end, businesses may leverage negative databases, which provide access to comprehensive lists of suspicious IPs, mailing addresses, and email addresses on a global scale. These databases are updated in real-time whenever instances of fraud are detected, allowing businesses to remain informed regarding whether any of their existing users have been identified as fraudulent actors.

By utilising these databases as a tool for fraud detection, businesses can enhance their ability to identify and prevent instances of fraudulent activity, ultimately improving the overall security and integrity of their operations.

  • Social network data analysis 

Engage in investigations of individuals, relationships, and other social structures to identify any links to fraudulent behaviour. In cases where customers exhibit suspicious behavioural patterns, such as frequent and rapid location changes over time, the system may flag these patterns as potential signals of fraudulent activity. By utilising this approach, businesses can more effectively identify and deter instances of fraud while also helping to safeguard their operations and protect the interests of their customers.

  • Fraud scoring services

Rank all transactions according to a fraud score or rating, which reflects the level of risk that each transaction poses to the business. Additionally, many such services can customise and adjust their fraud scoring models to better align with a company’s specific risk level, further enhancing the accuracy and effectiveness of their fraud detection efforts. By utilising these services to rank and evaluate transactions in real-time, businesses can more effectively identify and prevent instances of fraudulent activity while also minimising any negative impact on the customer experience.

METHOD #4: Built and Implement a Refund Policy

While the previous steps outlined are designed to minimise the risk of criminal fraud, it is essential to note that the possibility of friendly fraud still exists. Although businesses may be able to dispute instances of friendly fraud in court, this can be a costly and time-consuming process. As such, it is often more efficient and effective to take steps to prevent chargebacks from occurring in the first place. By proactively monitoring transactions and implementing tools and techniques to identify and address potential sources of friendly fraud, businesses can minimise the risk of chargebacks while also enhancing the overall security and integrity of their operations.

When customers are dissatisfied with a purchase and may be considering initiating a chargeback, businesses can take proactive steps to encourage these customers to apply for a refund instead. While refunds may still represent a financial loss for the business (e.g. shipping costs, etc.), they are typically less financially and reputationally damaging than chargebacks, which can result in losses several times greater than the original cost of the purchase.

By actively engaging with customers and working to resolve any issues or concerns that may arise, businesses can build stronger relationships with their customers while also minimising the financial impact of chargebacks and other forms of fraudulent or problematic behaviour.

To minimise the risk of chargebacks, businesses should consider implementing a clear and easily accessible refund policy for their customers. This policy should be designed to be relatively strict while still being understandable and transparent to customers.

Additionally, any potential additional charges or fees associated with the refund process should be communicated to customers upfront to avoid any misunderstandings or confusion that could potentially lead to a chargeback. By providing customers with a clear and consistent refund policy, businesses can help build trust and establish a positive reputation while minimising the likelihood of disputes and chargebacks.

While it may be impossible to eliminate the risk of fraud, taking proactive steps to address potential sources of fraudulent activity can significantly reduce the risks businesses face.

By implementing the steps discussed in this article, businesses can more effectively identify and prevent criminal and friendly fraud while improving their overall risk management strategies.

However, before taking any specific action, it is important for businesses to accurately identify and understand the type of chargeback they are facing, to develop an appropriate and effective response plan. By leveraging a combination of technology, analytics, and proactive engagement strategies, businesses can better protect themselves and their customers from the negative impacts of fraudulent activity.



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