Damaged reputation

The last thing any business would want is a bad reputation, especially regarding financials and defective products and services that harm your credibility. Too many chargeback instances can convey to your customers that you aren’t delivering your products and services satisfactorily. 

With chargeback frauds, it’s double the impact. Not only are you getting a bad image for your chargebacks, but you’re also giving a bad impression to your target market and stakeholders, like banks and card issuers, about the stability and security of your business, which can affect customer loyalty and potential investors.

David Haskins, CEO at WrongfulDeathLawyer.com, says, “Merchants with multiple chargeback cases can be put by card issuers on a chargeback monitoring program where you will be closely monitored to reduce chargebacks at an acceptable level, incurring you monthly or regular fees.”

Lost sales and additional fees

Lost sales are one of the significant impacts of chargebacks. In the case of chargeback frauds, you lose the value of the item that was intentionally kept by the fraudster and the money on the fraudulent chargeback raised against you.

With chargeback fraud, you also enter the normal chargeback process—from the card issuer to the credit card network. During the chargeback process, the merchant also pays chargeback fees for every chargeback raised by each customer per transaction. For example, Mastercard estimates that a merchant charges $15 to $70 for every dispute.

Operational costs

When a customer initiates a chargeback, a part of the chargeback process is for merchants to dispute the chargeback by providing evidence, documentation, and all necessary information to contest the claim and release the temporary debit of the chargeback from the merchant. 

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This process can be costly for businesses, either because of the manpower and resources required to collate evidence or because of the opportunity cost that could have otherwise been allocated to value-adding activities. This is especially true during peak times, such as Black Friday sales, when businesses need to allocate even more resources to handle the influx of customers and manage sales data, further straining their capabilities.

Risk of account closure

The acquiring bank or the financial institution that processes card transactions can close your merchant account for many reasons, including suspicious merchant activity, fraud, or if your account is about to breach card network chargeback thresholds, either through legitimate or chargeback fraud. 

For example, Visa considers a 0.65% chargeback ratio and 75 monthly chargebacks as an early warning for breaching chargeback thresholds, while a 1.8% chargeback ratio and 1,000 chargebacks are excessive.

Monitor and flag unusual transactions

Most fraudster activity lies in repeated and similar transactions fraudsters make in a short period to gain profit or file chargebacks for them later in the guise of flagging them for unauthorized purchases despite them being legitimate transactions to commit chargeback fraud.

Merchants can protect themselves by monitoring and flagging unusual daily transactions, using monitoring tools like fraud analytics to detect suspicious activity, or learning techniques on how to crawl a website without getting blocked. These tools and activities help conduct market research on chargeback fraud, tactics, and chargeback fraud occurrence in the industry to help prepare merchants for potentially fraudulent activities. 

Have clear return and refund policies—and make them known

Prevention is better than cure, and the most effective defense for merchants from chargeback claims and chargeback fraud is by implementing a robust and clear action plan and policies on returns and refunds.

When a merchant’s refund and return policies are unclear or ambiguous and cannot be easily seen, customers are more likely to file a chargeback rather than communicate directly with the merchant about other possible return options. 

Maintain good customer service

Open communication, good service, and customer relationships are key to resolving disputes, including avoiding chargeback fraud. 

Lev Peker, CEO at CARiD, says, “When merchants show active efforts and solutions to address customer concerns, especially post-sale concerns, customers are less likely to take advantage of return and refund policy loopholes to commit chargeback fraud.” 

Implement customer and card verification systems

Some customers commit chargeback fraud on purpose and as a habit, and even the best customer service cannot reduce the risk of merchants falling for chargeback fraud. In these cases, implementing robust customer and card verification systems can help protect merchants from chargeback fraud, including:

1. Have fraud-prevention tools to identify and avoid fraudulent transactions before they result in chargebacks.
2. Employ multi-factor authentication processes to verify the identity of customers to avoid transactions committed by fraudsters in someone else’s accounts.
3. Authentication steps like CVV or 3DS to authenticate transactions as extra layers of verification.

Grant Aldrich, Founder of Preppy, says, “Fraudsters target businesses with weak internal IT systems to commit fraud like chargeback fraud, especially in the absence of strong transaction verification systems. Professionals like Certified Ethical Hackers can help identify loopholes, vulnerabilities, and weaknesses in a business’s systems to reduce the risk of fraud in the organisation.”