Explaining chargeback fraud and how to prevent it

Setting up a card program is more difficult than you might imagine. Besides finding an issuer of digital and physical cards, you need to have a firm grasp on chargeback fraud.

This article will explain chargeback fraud so that it is easier to understand. It covers the intricacies of chargebacks and provides strategies to build a successful approach towards managing them.

Why are disputes and chargebacks important to Fintechs and enterprises?

When a cardholder contests a transaction on their account by contacting their card issuer, it is known as a dispute, which is intended to safeguard cardholders from fraudulent activity. If a dispute is successful, it can lead to a chargeback, wherein the issuing bank reverses a credit or debit card charge.

What is chargeback fraud?

Chargeback fraud is when a customer disputes a valid transaction, and the merchant cannot prove it. This is often referred to as "friendly fraud," when a genuine customer disputes a charge instead of discussing the issue with the merchant.

Criminals will also use stolen credit card details to make payments and then challenge the charge as unauthorised, resulting in chargebacks.

More companies are combating chargeback fraud than ever before. In 2022, there was a 75% increase in merchants implementing new measures to mitigate this type of fraud.

Reasons for chargebacks

The most common reasons for chargebacks are fraud, processing errors, and customer disputes. Fraudulent activity, such as unauthorised transactions or stolen credit card information, can result in chargebacks.

Processing errors can occur when the merchant makes a mistake, such as charging the wrong amount, charging the wrong card, or failing to provide adequate customer service. Customer disputes may arise due to delivery issues, product quality, or billing errors.

The negative impact of chargeback fraud

Financial losses, reputational harm and operational expenses are all possible consequences of chargeback fraud. Revenue can be lost, as well as chargeback fees, reducing profitability.

Payment processors and issuing banks may view merchants as untrustworthy due to frequent chargebacks. Investigating and responding to chargebacks may also add extra strain to resources.

The chargeback management process

Merchants can effectively manage chargebacks by familiarising themselves with the process. This includes receiving a chargeback notice, gathering evidence, submitting it to the payment processor or issuing bank, and awaiting the outcome. When the dispute is successful, the chargeback will be reversed and the amount reimbursed.

What a successful chargeback programme looks like for fintechs and enterprises?

Fintechs and enterprises can reduce the risk of chargeback fraud by putting in place an effective chargeback management system, incorporating the following measures:

Verify customer information

Merchants should verify customer details (name, billing address and contact info) prior to processing transactions. Integrating a customer-level Know Your Customer (KYC) will help to reduce fraudulent charges.

Use fraud detection tools

Detection tools analyse various pieces of transaction data such as an IP address, device information, and purchase history of customers. For example, matching up the IP address of a customer with their payment address to understand if the transaction is real.

Implementing chargeback policies and procedures

To effectively manage chargebacks, merchants should implement clear policies and procedures. This should include steps to take when a chargeback happens, like collecting evidence, responding to notices, and disputing chargebacks. Doing so will reduce chargeback fraud risk and make chargeback handling more efficient.