Chargeback fraud: everything you need to know for your business

Chargeback fraud has become a significant challenge for US businesses of all sizes and sectors.

Merchant Savvy indicates that 34% of merchants globally experience chargeback fraud. This represents one in three businesses reporting fraudulent chargebacks affecting their operations.

While chargebacks can protect consumers, they also expose merchants to substantial risks, such as lost revenue, administrative burden and added fees.

This guide provides you with an in-depth look at chargeback fraud. It identifies who is most at risk, details the different types of chargeback fraud and offers proven strategies your business can adopt to minimise its occurrence and impact.

What is a chargeback?

A chargeback occurs when a customer disputes a transaction with their bank. Sometimes, they may have raised concerns directly with the merchant, but often they have not. The bank acts on this information by reversing the payment and returning the funds to the customer.

Chargebacks were introduced to provide a level of protection for consumers and help them quickly resolve issues related to unauthorized purchases, faulty goods or unfulfilled services. Unfortunately, chargebacks also provide a route for fraudulent claims that abuse the original intentions of the chargeback system.

This increasingly creates challenges and difficulties for businesses, especially those selling online and reliant on card payments. These challenges go beyond the impact of losing a sale. They involve processing fees, increased administration requirements and potential reputational damages. If chargebacks accumulate – and they are certainly on the rise – banks may view a merchant as a risk, which can lead to higher transaction fees or even account suspension.

What is chargeback fraud?

Abuses of the chargeback system are known as chargeback fraud. This is a type of payment fraud where customers falsely claim a chargeback to reverse what was a legitimate transaction. There are several common types of chargeback fraud.

• Friendly fraud is anything but friendly to the business affected by it. This is when a customer mistakenly – or deliberately – claims they did not authorize a purchase, even though they did.
• Item not received fraud is when the customer claims that the product ordered never arrived – but it was, in fact, delivered successfully.
• Return fraud is when a customer files for a chargeback after returning a different item to that which was ordered or failing to return anything at all.
• Subscription fraud occurs when customers sign up for a subscription service, use it for a short period, and then dispute the charges as unauthorized.

Chargeback fraud affects nearly every industry, from e-commerce to subscription services.

In the rest of this guide, we will help you understand how chargebacks work, how to identify chargeback fraud and how to minimize its impact on your business.

Who pays for chargebacks?

In nearly every case, it’s the merchant that bears the financial burden of chargebacks. The associated costs include the loss of the disputed sale, as well as the responsibility to pay any associated fees levied by the payment processor.

Longer-term further costs to businesses may be introduced if it is flagged as high-risk by banks because of the number of chargebacks received. This classification can lead to further charges or even a suspension of card-processing privileges.

This is why it’s essential that your business understands the proactive measures that can be taken to minimize chargeback rates.

The types of businesses that are most affected by chargeback scams

While any business that accepts credit cards can be affected by chargeback fraud, certain sectors are especially vulnerable due to the high costs of their services or products or the nature of these.

Here are some examples of the sectors at the greatest risk:

• Luxury goods retailers: Those selling luxury goods or other high-ticket items are attractive to fraudsters, as there’s more to gain from disputing a transaction by claiming items never arrived or were returned after purchase.
• E-commerce businesses: As remote, online transactions lack face-to-face verification, e-commerce businesses are more susceptible to friendly fraud and item not received fraud.
• Subscription-based services: Many subscribers dispute charges after using the service, especially when they forget to cancel after an introductory offer or trial.
• Travel and hospitality: This industry experiences a higher level of cancellations and disputes, as customers sometimes create a chargeback following dissatisfaction with the level of service.
• Food delivery services: Quality, accuracy and service disputes also lead to a high level of chargebacks for those delivering takeout to homes.

How to prevent chargeback fraud

Understanding how chargeback fraud can affect your business and how it is increasingly used is the first step in preventing it. Effective prevention, however, requires a mix of clear customer communication, robust policies, and technological tools to help you identify and manage fraudulent chargebacks.

Below, you can explore the strategies that will help safeguard your business from chargeback fraud.

Provide clear product descriptions and pricing information

Chargebacks often stem from customer confusion or misunderstanding.

This can be minimized by ensuring that your products or services are accurately and clearly described. You should also ensure that your pricing is transparent.

This clarity can reduce misunderstandings that may lead to disputes.

In addition, highlighting the terms and conditions of your sale, such as return policies, restocking fees and delivery timelines, ensures that customers have clear expectations, reducing the likelihood of chargebacks.

Use a chargeback management system

A chargeback management system, like Worldpay’s Dispute Management, is a valuable tool for efficiently managing the process of handling disputes.

Using this system, you benefit from real-time notifications of disputes, allowing you to respond quickly. The dashboard helps you organize and monitor chargebacks, helping you respond efficiently and effectively to reduce chargeback rates.

Improve customer service

Effective and responsive customer service can prevent chargebacks by addressing customer grievances before they escalate.

Make sure that your support team is accessible according to the communication preferences of your customers – consider adopting a multichannel approach.

A support team that is easy to reach and quick to respond can swiftly resolve issues that might otherwise lead to chargebacks. Customers who feel they’ve been wrongly charged may be more likely to approach the business directly, rather than their bank, if they know their concerns will be promptly addressed.

Use fraud detection tools

Fraud detection tools can help businesses prevent suspicious transactions that often lead to chargebacks. Advanced systems provide a sophisticated fraud prevention tool that analyzes your transaction data to detect unusual patterns and block fraudulent activities.

Identifying risks before transactions are processed will reduce the number of fraudulent chargebacks your business faces.

Require proof of delivery

For physical goods, using recorded or tracked delivery methods proves that an item was indeed sent and received. This documentation is crucial in preventing item not received fraud.

Recorded deliveries can also help with claims related to damaged or incorrect goods, as tracking and handling information is stored and can be referenced in a dispute.

For further tips, explore our collection of strategies to reduce chargebacks, which highlights more ways to minimize chargeback risks.

Chargeback fraud presents a significant financial challenge to businesses. It affects more than one in three businesses globally.

However, by using available tools and implementing best practices, you can minimize the impact of chargebacks on your business.

We’ve highlighted dispute management platforms, fraud detection software, responsive customer service, tracked deliveries, and transparent descriptions and pricing as effective ways to bring down the number of chargebacks your business faces.

You can take the first step in preventing chargeback fraud affecting your business with Worldpay’s chargeback solution and dispute management suite.