Chargeback Fraud: What is it and x Prevention Measures

Chargeback Fraud: What is it and 4 Prevention Measures

Unfortunately, chargebacks are part of every eCommerce business’s reality. While they were put into place to be a solid protection mechanism for customers, brands are faced with the time-consuming task of separating legitimate transactions from fraudulent payment disputes to avoid costly repercussions.

With more and more reports of hacked databases and leaked customer information, tackling chargeback fraud has become increasingly of concern for online merchants due to the significant financial losses they cause. 

In 2021 alone, chargeback fraud has ended up costing online businesses a whopping $20 billion. 

It’s high time we talked about this topic, exploring: 

What is Chargeback Fraud? 

Chargeback Vs. Chargeback Fraud

The 3 Steps of The Chargeback Process 

How Does Chargeback Fraud Affect Your SaaS 

Common Chargeback Fraud Causes 

4 Chargeback Fraud Prevention Best Practices  

How Can PayPro Global Help 

What is Chargeback Fraud? 

Chargeback fraud occurs when a customer makes a purchase and disputes the credit card payment, claiming that the transaction was fraudulent or unauthorized. 

While this might sound similar to the chargeback process, the difference between the two is that this scenario is fully intentional.

While the common thread is that the consumer initiates the chargeback to receive a refund while keeping the product or service received, there are several forms chargeback fraud takes: 

Friendly Fraud

This is the most common type of chargeback fraud, where a cardholder makes a legitimate purchase only to dispute it later, claiming that they either did not authorize the transaction or the goods or services bought did not match the description.

While there may be instances in which the cardholder forgets that they made the purchase or does not recognize it on the billing issue, there is a clear desire to exploit the chargeback process in most cases. 

Digital Goods Fraud 

When selling software licenses or digital goods, your customers may dispute certain charges after accessing the product received. This is a particularly difficult-to-handle scenario because the user typically has plenty of time to download the product before filing the chargeback. 

Subscription Fraud

Subscription businesses are often faced with chargebacks from customers disputing recurring charges and claiming that even though the service was canceled, they were still charged.

3-Types-of-Chargeback-Fraud

Chargeback Vs. Chargeback Fraud 

Chargebacks were not created with the intention of giving users the means to conduct criminal activity. Quite the opposite, actually.

Traditionally, chargebacks are meant to be a protection tool for customers.

Unfortunately, fraudsters are increasingly ingenious when it comes to new ways to deceive merchants, managing to corrupt this premise as well. 

Because chargebacks are a sensitive topic for all those involved, it’s important to take the right measures, and the first step in doing so is learning to differentiate between lawful chargebacks and false ones.  

Real Chargebacks

It is a legitimate protection mechanism created by credit card companies to prevent fraud for customers.

However, order product issues, products not received, incorrect amounts charged, and fraud are all reasons used in chargeback disputes.

 

Fraudulent Chargebacks

It is a criminal fraud practice when the consumer disputes a legitimate transaction with the intention of gaining a refund without reason. 

An illegitimate chargeback abuses the protection mechanism and benefits the fraudster while also causing significant damage to the online brand in question.

Chargeback fraud consequences come in different forms, from chargeback fees and increased operational costs to extensive reputational damage. 

 

The 3 Steps of the Chargeback Process

To fully understand the repercussions of this practice, one must first understand the process. Managing chargebacks involves certain steps:

Step One: Dispute Filing 

The customer files a dispute they do not recognize as a chargeback to their bank or credit card company. 

Step Two: Examination 

The customer’s bank analyzes the dispute, requesting additional details from the cardholder and merchant. 

If, during the investigation phase, the dispute is regarded as valid, the customer is provided a temporary refund. However, during the chargeback process, the merchant can respond to the dispute and bring further evidence to support the validity of the transaction. 

The bank will continue reviewing all received information to make an informed final decision. 

Step Three: Resolution  

Once the bank has completed analyzing the documents received, a decision will be made whether the chargeback will be upheld or reversed. Both parties are informed, and the appropriate actions are taken. 

Chargeback-Process

It’s important to note that these steps might differ, considering the dispute management programs and policies specific to existing payment networks ( ex, Visa’s Dispute Monitoring Program). 

Even though the process might not appear too complex, from a merchant’s perspective, the workload involved in collecting and retrieving the required documentation cannot be understated or ignored. 

And that’s putting it lightly. 

How Does Chargeback Fraud Affect Your SaaS?

When selling software, SaaS, or digital goods, you are by no means spared of fraudulent transactions. If you do not take the necessary prevention measures, your SaaS business could easily fall victim to fraudsters and suffer the consequences of chargeback abuse. 

But what would those be? Let’s find out!

Extensive Revenue Losses 

With friendly fraud, eCommerce businesses not only record the losses associated with fraudulent chargebacks but are required to pay costly fees to their payment processors, which can increase if chargebacks appear too often. 

Reputational Damage 

Excessive chargebacks can have a serious backlash on a company’s reputation, having the power to tarnish its trustworthiness. 

You have to put yourself in your customer’s shoes and ask yourself if you would make purchases from a company perceived as untrustworthy. 

Probably not. 

So, it’s safe to say that repeated customer disputes can lead to a significant decline in future sales.

Increased Operational Costs

When chargebacks occur, you are required to take action - and the sooner, the better. However, managing the chargeback dispute process, performing identity verification, sorting out real from fraudulent transactions, and collecting evidence can be time and resource-consuming operations. 

Fighting chargebacks, while necessary, can be an extremely costly affair that can take you away from other important objectives, such as developing new products or building strong, long-term relationships with your paying customers. 

Significant Fraud-Prevention Efforts 

It’s not enough to understand that online fraud is a modern reality. It’s essential that you find and invest in the right means to combat chargeback fraud effectively. 

Building a strong security infrastructure might not eliminate the chargeback threat altogether, but it will most certainly reduce the number of fraudulent transactions. And that in itself is an important gain. 

Nevertheless, protecting your SaaS business through dedicated fraud detection and prevention software, security systems and procedures, and staff training can lead to significant costs, ultimately impacting your company’s bottom line. 

Boosted Chargebacks Rates 

Chargebacks are not only responsible for lost revenue due to the refunds resulting from fraudulent transactions, but they can also result in hefty penalties from your payment processor. 

When chargebacks occur in a greater number than a certain percentage of your sales, you are flagged as a business with a high chargeback ratio. This increases payment processing fees, and in certain instances, merchant accounts can be restricted or could even be terminated. 

How-is-SaaS-Impacted-by-chargeback-fraud

This puts tremendous pressure on your company and staff, making it rather challenging to manage a high number of disputes when more and more resources to run your business are required elsewhere within the company.

Also, even if you win the chargeback, the ratio still counts towards your merchant account, and you can be fined or terminated by the credit card schemes. 

Common Chargeback Causes 

To effectively combat and prevent chargeback fraud, you must understand why it happens. Or better said, when it happens. 

Recognizing that not all chargebacks result from fraudulent activity, it’s essential to be skilled in carefully examining chargeback alerts in a timely manner and swiftly distinguishing between valid claims and those rooted in fraud. 

The foundation for accurate identification lies in understanding the underlying causes of chargebacks.

Inexperience with Chargeback Procedures

For a large number of customers, the concept of chargeback is quite abstract, being completely unfamiliar with it. 

This can lead to many unintentional chargeback requests, which could have been easily solved through a refund. Instead of contacting their eCommerce merchants, customers contact the bank, which causes the transaction to be flagged as a chargeback.

Misinterpretation of Refund Policies

Communication is key to success in the online world as well. Like all eCommerce companies, SaaS businesses need to have clear refund policies that leave no room for misinterpretation. 

If a customer is unsatisfied with the product or service purchased, the refund policy should be the first step in resolving the issue. But, because of unclear procedures, customers often resort to chargeback requests. 

Accidental Chargeback

Error is human, which is also true in the digital world. 

The legitimate cardholder can simply forget about a charge and assume it’s a fraudulent transaction. It’s sometimes an honest mistake, considering the average US consumer can have up to 12 subscriptions at any given time. 

Intentional Chargeback Fraud 

Since we have discussed how a legitimate charge can end up filed as a chargeback, it’s time to talk about the most dangerous of all causes that keep chargeback rates up lately: fraud. 

Using stolen credit card information fraudsters can use stolen credit card info to purchase products. Then, the legitimate card owner will make a chargeback because they do not recognize the charge. 

4 Chargeback Fraud Prevention Best Practices  

Unfortunately, with the success of your online business comes the headache of customer payment disputes. It’s just how the eCommerce world works and is the nature of the business. 

Luckily, even if one cannot fully eliminate this threat, there are ways to reduce chargeback fraud and manage it so it does not rob you of significant revenue. 

Offer Stellar Customer Service 

Frustrated customers are more inclined to dispute payments. So, in order to reduce real chargebacks, businesses should prioritize dedicated customer support and assistance focused on clarifying payment-related issues. 

As long as you address your customers’ issues promptly and satisfactorily, you will likely make them reconsider their plan to file for chargebacks. 

But remember, customer support shouldn’t only be regarded as a prevention instrument. Customer interactions can serve as valuable documentation that can be used as evidence in chargeback management processes. Chat logs, support tickets, and emails are resources that can come in handy and will be requested by the processor. 

Keep in mind, though, that customer support alone is not a fraud prevention mechanism. 

Enhance your Payment Processing Protocols

Fighting chargeback fraud is not simple. Luckily, your payment processor can help. By implementing secure protocols, you can discourage fraudsters. 

Data encryption: Through SSL certificates, you are telling your customers that your business takes data protection seriously and has the right protection mechanisms in place. 

3DS2: The 3-D Secure payment security measures are widely used by businesses because they allow you to collect information both during and after the checkout phase. IP address, purchase amount, and transaction history are shared between the acquiring and issuing bank and the payment processor and are then swiftly analyzed.

Strong Customer Authentication (SCA): This protocol enhances payment security through different measures like multi-factor authentication, one-time passwords, or biometrics.  These make it harder for unauthorized transactions to take place.

Tokenization: This security technique involves replacing sensitive payment-related information like credit card numbers with a unique and non-sensitive identifier. Known as the token, this is actually a random string of numbers with no connection to the original data. 

Perform transaction monitoring 

Transactions, like everything else, have patterns. Analyzing these patterns and identifying irregularities can help detect fraudulent attempts and set them apart from real charges. 

It’s essential to implement real-time payment monitoring systems. These can quickly detect anomalies like multiple transactions in a short timeframe or unusually high-value payments. 

By setting up predefined criteria for fraud, you can add alerts and notifications to your system to signal when fraudulent attempts occur. 

Maintain transaction records 

Apart from prevention measures, it would be wise to have systems in place that allow you to dispute the chargebacks filed. And the only way to do this is to keep detailed records of all customer payments. 

So, maintain customer communications, electronic records of credit card payments, and order confirmations, all for a reasonable period and in secure conditions, complying with all data protection rules and regulations.

Meet PayPro Global.
The Merchant of Record that helps you grow. 

Unlock unprecedented growth with our Merchant of Record model. From simplified tax and compliance management to global payments and automated billing, PayPro Global takes care of everything for you.

 
Focus on your product. We’ll handle the rest. 

 

How Can PayPro Global Help? 

PayPro Global’s all-in-one eCommerce solution helps software, SaaS, and digital goods providers sell their products worldwide. 

With fraud being a massive concern for all entrepreneurs looking to reach customers in different parts of the world, lowering your chargeback fraud rate is a matter of implementing correct fraud prevention and detection mechanisms. 

As a PCI-DSS level One certified partner, PayPro Global offers a holistic fraud protection infrastructure, incorporating different approaches to significantly reduce fraud attempts.   

We can proactively detect and rapidly address anomalies or performance barriers through multi-level internal systems combining machine learning algorithms, advanced monitoring tools, automated alerting systems, regular audits, and manual verifications. 

Also, by providing robust risk and compliance and exceptional customer service, PayPro Global’s unique Merchant of Record model helps you stop chargebacks before they occur.  

Visit PayPro Global or reach out to find out how we can help take your SaaS global.

Final Thoughts

With fraudsters becoming increasingly inventive when thinking of new methods and techniques to cheat online businesses, chargebacks are becoming too tough a beast to fight on your own. And simply ignoring it or hoping it will disappear is no solution. 

Closing your eyes to chargebacks and simply pretending that they don’t exist will ultimately cripple your business. Choosing not to touch lucrative markets because of their higher fraud rates is not a good long-term solution either. 

Effectively fighting chargebacks is a question of finding a dedicated partner capable of implementing strong mechanisms and systems that add multiple protection levels.  
Chargebacks aren’t going anywhere, so don’t let them stall your SaaS’s growth.

 
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Meir Amzallag

Co-founder and CEO of PayPro Global | Discover a collection of articles on B2B marketing, subscriptions, and e-commerce strategies

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Content Marketing Manager at PayPro Global | Discover a collection of articles on B2B marketing, subscriptions, and e-commerce strategies

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