Decoding Fraud-Related Chargeback Reason Codes: What Merchants Need to Know

Issuers communicate chargebacks through reason codes. These codes will tell you what caused the issuer to escalate a dispute to a chargeback for the cardholder. They also help you narrow your defense to reverse the chargeback.

You’ll have more information in the chargeback message. Nevertheless, most issuers provide details on how to dispute chargebacks based on the reason codes.

Fraud-related chargebacks can cause your business to be block listed if they occur frequently. Most issuers have a threshold above which they might stop servicing your business. Hence, identifying, resolving, and preventing chargebacks of this nature is crucial.

The Role of Reason Codes in Fraud Detection

Cardholders can dispute transactions they did not participate in or authorize. These can be stolen cards or forced transactions where the merchant manually enters the card details. Financial institutions will classify chargebacks as fraud since the cardholder denies authorizing the transaction.

Whether the merchant or the issuer should bear the liability for the fraud boils down to what the merchant did to prevent the fraud. The chargeback reason code will indicate what type of fraud occurred. It might not explicitly call it fraud, but the code will be in the fraud category.

The chargeback reason code points out what evidence you need to dispute the chargeback. In fraud-related cases, you’ll know which documents will prove you did your part in the transaction to prevent the fraud. Submitting these documents is the only way to reverse the fraud-related chargeback and pass the liability to the issuer.

A popular example is Visa’s liability shift reason codes. While backing Visa’s legitimacy for a chargeback, the codes also present an opportunity to dispute the chargeback and make Visa liable. Fraud-related chargebacks often boil down to who was at fault for not preventing the transaction.

Exploring Key Fraud-Related Reason Codes

Visa, Mastercard, American Express, and Discovery Network have codes to denote fraud-related chargebacks. The prominent ones include the following:

Visa Chargeback Reason Code 10.1

The short code for this code is “EMV liability shift counterfeit fraud.” It is used for transactions where the cardholder denies ever swiping their cards physically. In other words, the original card was absent during the transaction, and a counterfeit card was used.

Card cloning is possible by copying the card’s magnetic data and creating a new one. Nonetheless, an EMV terminal and robust verification process should recognize these clones. Visa would consider you liable for the chargeback if you used a non-EMV terminal with poor verification systems.

Here’s what this chargeback code signifies about the nature of the fraud:

• Your payment terminal was non-EMV
•  The payment occurred without a chip-reading device
•  Your card processor sent an authorization request with incomplete card information

The absence of an EMV terminal makes you liable for the chargeback. A regular occurrence will push you toward the threshold in the Visa fraud monitoring program.

Mastercard Chargeback Reason Code 4837

You’ll experience chargebacks under this reason code if the cardholder denies authorizing a transaction. The short code is “no authorization” and is often related to fraudulent transactions. In this case, someone stole the card’s details and used them for a legitimate transaction.

Chargebacks under this reason code can be tricky because friendly fraud is possible. Nonetheless, pointing to unauthorized use is challenging if the person uses the correct details. It’s not like you must perform facial recognition or biometrics.

The only way to reverse chargebacks in this category is to prove that the transaction was adequately authorized.

Discover Chargeback Reason Code UA02

Fraud is mentioned in this chargeback reason code, as the short code states, “Fraud: Card not present transaction.” It applies to online payments, including mail orders. Again, the cardholder denies authorizing the transaction.

Someone can steal a card’s details and use them to place an order. They don’t need cloned cards since they do not require physical card swipes. Also, they may obtain accurate authorization details, like the card PIN and other security details.

The only way to dispute chargebacks under this reason code is to present adequate evidence of obtaining authorization. That will take care of the liability even in cases of friendly fraud.

American Express Chargeback Reason Code FR2

Receiving chargebacks under this reason code means you are in the American Express Fraud Full Recourse Program. Only merchants with an excessive record of processing fraudulent transactions are in this program. You’ll be limited in how much evidence you can present to dispute chargebacks under this reason code.

This reason code allows American Express to deduct the chargeback without any notice or inquiry. Typically, the issuer will send an inquiry or inform you before escalating a dispute to a chargeback. Being part of the Fraud Full Recourse Program means you won’t enjoy that privilege.

You can remove your business from this program by reducing the occurrence of fraud-related chargebacks.

Impact of Fraud-Related Reason Codes on Businesses

Receiving chargebacks under fraud-related reason codes is one thing, and disputing them successfully is another. Issuers believe you shouldn’t receive fraud-related chargebacks if you take adequate preventive and security measures. Some even list and persuade merchants to use these measures, like EMV terminals.

While disputing fraud-related chargebacks, preventing them is best. Here’s how they can impact your business:

• Loss of brand image and reputation: Customers will lose faith in your ability to protect their transactions and card details. The same extends to issuers, where they place you in different fraud-monitoring programs. They may restrict how much you can process, and let’s not go into government inquiries.
•  Inability to retain customers: Most cardholders will turn to other businesses to avoid waking up one morning and losing all their cash. A loss of reputation comes with a loss of trust. If they can’t trust the business, they won’t return for a repeat purchase.
• Financial losses: With fewer customers comes less revenue. Also, you will lose cash to chargebacks if they are true. Some cases may involve extra settlements if the cardholder takes up the issue in court.
• Loss of competitive advantage: The business will likely lose to the competition. It will have little to work with when competing with more reputable businesses. Rebuilding a reputation can be challenging and time-consuming.

Recognizing Patterns and Red Flags

The best way to recognize patterns is to look at the chargeback reason code short codes. These will tell you the most likely cause for the chargeback. For example, the Visa chargeback reason code 10.1 already points to your payment terminals as non-EMV enabled.

Look at why these reason codes occur. Another example would be incurring chargebacks on transactions where you bypass typical authorization procedures. That is enough for you to stop bypassing authorization and stick with industry best practices.

Conclusion

Understanding fraud-related chargeback reason codes is critical for a merchant who seeks to make a well-informed decision when facing disputes. The integral alphanumeric codes aid in spotting possible errors on the merchant’s side and providing intelligence on each dispute. With Chargeflow, a merchant can streamline chargeback handling and gain access to advanced analytics to counter potential fraud. A merchant is always informed about coded disputes and preventive strategies, and the merchant’s payment systems are always safe. A merchant concentrates on Chargeflow to shield transactions and maintain the safety and reputation of a business. Chargeflow is your proactive companion in striving to alleviate fraud-related fees.