Fraud Prevention vs. Chargeback Management: Balancing the Scales

What is the best way to limit chargebacks? Or more specifically, what is the most resource-efficient way to limit chargebacks? That is certainly the million-dollar question.  

The payment industry offers merchants numerous answers. Chargeback insurance, fraud tools, and customer service are all common (and helpful) examples. Chargebacks are a complex problem—that deserves a myriad of possible responses.

Luckily, to make things easier for ourselves, we can classify all of the many strategies into two main categories:

●       Pre-sale prevention. These are strategies you use to stop a dispute before it happens. Every merchant needs a front-line defense, a set of best practices that stop instances of fraud. A healthy business is always ready to deflect risky transactions (for those orders often turn into costly chargebacks). Each fraudulent order you prevent removes all the following chargeback headaches: fees, ratio thresholds, and evidence compilation, etc.  

●       Post-sale management. These are strategies that win back revenues after a consumer files a chargeback. Whether we like it or not, no one is perfect—chargebacks will occur. But just leaving those chargebacks unaddressed is costly. These are not just small, one-time losses: merchants only successfully dispute and win 43.82% of friendly fraud cases. In other words, merchants lose 56% of cases, and these are cases based on a false claim. False claims should not be a cost of doing business. And, they are winnable. Yet merchants are leaving half that revenue on the table.

Which of these two primary strategies is best? Where should you invest your resources? Let’s explore preventative and reactive chargeback management strategies.  

Understanding Fraud Prevention

Fraud prevention refers to the defense measures you use to limit criminal activity. Fraudsters execute a seemingly limitless number of scams, all with the hope of illegal financial gain. In response to those threats, you build a security posture. 

For example, think of a fraud ring that creates fake gift cards. As a defense, you may introduce AI-powered detection tools. These algorithms analyze all incoming gift card orders and delete any false transactions.

Or consider a group of hackers. They might try to execute an account takeover by password spoofing. But you prepared with security tools that require strong passwords and biometrics for all log-ins. The hackers can't crack these defenses, so they gain no access.    

Each of these security best practices secures incoming transactions. Verifications, alerts, and data analysis all act as filters, ensuring that every order is legitimate. You stop bad actors in their tracks.

Asa result, the more fraudulent orders you deny, the fewer chargebacks. Customers will dispute fraudulent charges—that is the whole purpose of the chargeback process. So when you deflect fraud before the sale occurs, you stop chargebacks at the source.

Exploring Chargeback Management

Post-sale chargeback management refers to the measures you use to limit the damage connected to a dispute. Things happen and chargebacks occur. But you do not need to roll over and accept those costs. You can take action to minimize the financial fallout.

For example, a customer may file a chargeback due to a purchase error. By accident, your systems used the wrong numbers. But instead of accepting the fees and costs, service reps reach out to the consumer. Together, they fix the numbers and the customer happily withdraws the chargeback. Crisis averted.

Or consider a consumer who forgets about a purchase and files a dispute. That is a wrongful claim, even if done by accident. To correct the issue, you build a case. Several chargeback management tools compile receipts, product descriptions, and confirmations. With all that evidence, the card issuer sides with your version of the story. All earned revenues return to your merchant account.

Asa result, good post-sale chargeback management minimizes financial losses(especially with instances of friendly fraud). You “delete” or “reverse” the damage of the chargeback. The strategies function as good revenue-protecting tools.

The Balancing Act: Integrating Fraud Prevention with Chargeback Management

Both pre and post-sale strategies offer unique advantages. And both serve different purposes. But while one management game plan may seem more optimal than the other, each strategy only functions well when used in tandem. You need both. Over-reliance on one strategy reduces overall effectiveness.

Imagine that you only invested in prevention solutions. Yes, your overall chargeback volume will decrease as you deflect more risky orders. But now you have almost no defenses against friendly fraud. How do you protect yourself if a consumer disputes a charge their child made in a video game? That is a transaction no prevention solution can catch. But with zero post-sale solutions, your dispute defense teams have no resources to fight the wrongful claim. A winnable case becomes a direct revenue loss.

Or consider the other side. Imagine you invested all your resources into post-sale chargeback management. Yes, you would have excellent measures to win numerous disputes. But criminals would also have free access to your business. The latest scam would skip right past your outdated security. With zero resources for prevention, your defenses are non-existent. Your business reputation would crumble, as no consumer would feel safe shopping at your store.

Aggressive investment in one strategy at the expense of the other is ill-advised. Instead, look for balance. Pre and post-sale strategies must combine for a truly holistic and effective defense.

Chargeflow's Role in Achieving Balance

So where do you invest your resources? There often isn’t enough available capital for such holistic investment. Plus, focusing everything on the problem of chargebacks can divert much-needed resources away from growth or other business functions. As stated before, it's not just about limiting chargebacks. It’s about limiting chargebacks efficiently.

At Chargeflow, we understand this predicament.  And that's why we deliver balanced protection via automated tools. Technology and industry know-how can address the difficulties merchants face. In reality, there is no need to divide your resource investments—lowered costs via automation allow you to manage both strategies. It is how you can achieve a balanced approach.

●       Chargeflow pre-sale fraud prevention: The defining feature of our pre-sale tools comes from automating the differentiation between legitimate and fraudulent chargebacks. In other words, we use a sophisticated detection system that ensures accuracy. Through preemptive measures and alerts, you proactively anticipate and prevent disputes. But more importantly, that system is automated. It requires no manual effort. You detect fraudulent transactions with less demand on resources. It's high-level prevention for less.  

●       Chargeflow post-sale management: Our systems also work directly with your post-sale management strategies. Collected data on each transaction allows us to produce the most comprehensive chargeback evidence in the world, custom-tailored to your store. That's how we achieve an industry-leading recovery rate. And once again, everything is automated, so no intervention on your behalf is required. Earn back revenues without the high cost.

The Key Takeaway

Fraud prevention and chargeback management work hand-in-hand. It is not a case of either/or—rather, it's about achieving balance.

Luckily, technology can take on an evolving role and serve merchants in this regard. Proactive tools can ensure you handle transactions properly, both pre and post-sale. And with the efficiency of automation, you can achieve such holistic protection without divvying up your resources.

Such an integrated approach will result in better business integrity and earn consumer trust at all stages of the buyer's journey.

Want to know more about how Chargeflow can help? Contact our service reps to explore our chargeback management tools.