Chargebacks: A Growing Threat to eCommerce Brands

E-commerce makes shopping easy and payments fast. In fact, most customers now pay with saved card data without even thinking. However, this increase in purchase volume and decrease in payment awareness has led to a rise in chargebacks that has become a significant concern for retailers. Worse, in the wash of valid chargebacks and honest mistakes, a growing percentage of chargeback fraud incidents slip through.

How can retailers offer valid payment transparency for things like missing and mistaken orders while defending themselves from fraudulent and unnecessary chargebacks? Chargeback fraud is a multifaceted issue affecting profit margins and operational efficiency–from “friendly fraud” (honest mistakes) to intentional theft, e-commerce retailers must now build a more sophisticated approach to both quantify and prevent chargeback losses.

Understanding Chargeback Fraud

Chargeback fraud occurs when a customer cancels or reverses the payment on an order that was legitimately delivered. As e-commerce races ahead of financial infrastructure, card providers do not always accurately prevent non-valid chargeback requests, resulting in as much as $4 in cost for every $1 charged back.

Reasons behind chargeback claims vary, including fraudulent activities, customer disputes, and processing errors. This has had a major impact on the e-commerce community as retailers lose money, often more than they realize, causing an imbalance between completed orders and actual revenue.

Exploring the Causes of Chargeback Fraud

Understanding the complexity of chargeback fraud is essential for e-commerce brands, as it encompasses a variety of root causes that can significantly impact business operations and financial stability. From the theft of credit card information to instances of inattentive purchases, the use of shared purchasing accounts, and even occasional processing errors, the landscape of chargeback fraud is multifaceted and requires comprehensive strategies for prevention and mitigation.

Stolen Card Information

When a hacker or criminal steals someone’s payment card information and makes a purchase, the cardholder can rightfully request a chargeback on the stolen amount. However, this is still costly for the vendor who provided goods or services to the criminal.

Friendly Fraud

Friendly fraud occurs when a customer requests a chargeback because they don’t recognize a transaction, even if they did make the purchase and receive the order.

Intentional Fraud

Criminal chargeback fraud occurs when someone intentionally requests a chargeback while knowingly receiving the purchase at the same time

Merchant Errors

Merchant errors such as missing orders, delayed shipping, and double-charging are all legitimate reasons for chargebacks, but they still cost the vendor in terms of time, effort, and fees.

Online Shopping and Chargeback Incidents

Online shopping has also increased the rate and opportunity for chargeback incidents. Paying automatically with pre-loaded card information reduces a customer’s awareness of each purchase, and shared accounts mean sometimes customers chargeback unrecognized transactions made by a family member using their online card.

Strategies to Combat Chargeback Fraud

Fortunately, there are many different methods that can help you prevent chargeback incidents and detect chargeback fraud before a chargeback clears through the card provider.

1. Implement Advanced Fraud Detection Tools

Defend your business from chargeback fraud with advanced fraud detection tools. The right built-in defenses can help you identify and prove fraudulent chargebacks in time to stop them.

• AI and ML Fraud DetectionArtificial intelligence and machine learning programs can learn to identify fraud-related patterns such as timing, location, and chargeback reasons that do not match the order details.
• Real-Time Transaction and Order MonitoringMonitoring transactions and each order status in real time can help you detect chargeback fraud. For example, an immediate chargeback request or a chargeback before a package is even scheduled to arrive.
• Customized Fraud Detection SettingsFine-tuning fraud detection settings can help you tailor your defenses based on the specific flow of your business and when chargeback fraud is most likely to occur.

2. Proactive Customer Engagement

Friendly chargeback fraud occurs when customers are unaware of their own payment behavior. Increasing customer engagement can help customers confirm their expenses with confidence instead of requesting a chargeback for purchases they don’t remember.

• Transparent Payment PoliciesMake your payment policies clear so customers are making a conscious decision to buy (or subscribe) during the conversion process.
• Clear Product DescriptionsChargebacks can stem from products not being what the customer expected. Therefore, clear product descriptions with vivid photos of the product in action can reduce the frequency of ‘not as expected’ chargebacks.
• Efficient Return ProcessesMake sure customers have an easy way to return items for valid refunds so they go through the proper channels instead of requesting a chargeback.
• Increased Payment EngagementMake sure customers are buying consciously. Have them choose a card and enter the CVV so they are fully aware when they make a purchase.
• Clear Transaction Record DetailsWhen charges appear on the customer’s card transaction history, make sure that the transaction record is detailed and easy to understand. A mysterious charge will almost always trigger a chargeback.
• Immediate Billing Email ReceiptsAlways issue a receipt email with every payment. This can also alert customers if their child, friend, or hacker is using their card without their knowledge.
• Clearer Billing InformationProvide clear and itemized bills, so customers know exactly what they have paid for. Transparency is essential.

3. Enhanced Verification Process

Make sure customers verify their identity and ownership of a card before they purchase. This will not only reduce the frequency of chargebacks but also help reduce the amount of fraudulent purchases made on your site.

• Two-factor Authentication (2FA)2FA requires customers to confirm their order through a text or email and alerts them if someone else is trying to use their account.
• OTP Number EntryA one-time code ensures that customers are fully engaged in confirming their login or order, as customers may automatically approve with a simple click or button press.
• Location and IP MatchingRequire customers to confirm their identity again if their location, device, or IP address suddenly changes.
• CVV Requirement for Saved CardsEven if you save cards for quick checkout, it requires the CVV, which ensures customers have their cards on hand when they buy and increases the memory of the purchase.

4. Educating Customers and Employees

You can help customers keep their payments safe and shop confidently by educating them about secure online shopping practices and what it means to request a chargeback. You can also train employees to provide attentive customer service to prevent friendly chargebacks and to recognize potential fraud with swift action.

Implementing a Chargeback Prevention Framework

You can create a comprehensive plan to prevent chargebacks for your e-commerce brand by implementing a robust framework. Begin with prevention best practices, as we have listed above, to minimize avoidable chargeback incidents. Then regularly review the chargebacks that occur in spite of your initial prevention efforts.

Use data analysis to identify trends in the causes of chargebacks or patterns in chargeback fraud. Then, adopt new strategies based on those trends to better prevent avoidable incidents, prevent fraud, and appeal fraudulent chargebacks before they are processed.

Protecting Your E-commerce Brand from Chargeback Fraud

Chargebacks can be costly. While some chargebacks are part of doing business, every e-commerce brand should also strive to prevent chargebacks with a combination of excellent customer service and chargeback fraud detection.

Addressing chargeback fraud can help you maintain your brand’s profitability and reputation. Now is an important time to adopt a holistic approach to chargeback prevention involving technology, education, and practical customer service.

Contact us for the tools and insights you need to reduce the risk of chargebacks.