Let’s examine how chargeback fraud prevention can work for you.
We all know the online world is riddled with scammers. They maliciously sell the wrong items and services, or never deliver them at all.
Similarly, credit card numbers are stolen all the time. And chargebacks are the best way for customers to reclaim the funds someone spent without their knowledge.
Which is why, at their core, these solutions are indeed a great way to protect customers.
The problem is that disputes are a complex, and costly process. Worse, some customers now abuse them, and essentially become fraudulent.
So in this post, we’ll see how anti fraud tools can help prevent and avoid them in the first place. And please note that for a more-in depth look, you can check out our ultimate guide on the same topic here.
Why Chargebacks Are So Expensive
Each request involves quite a number of players. First, there’s the cardholder and their bank (the issuer), who made a CNP or card not present transaction. Then there’s the merchant (your business) and your bank (acquirer). There’s also the payment gateway, or software used to transfer transactions between you and your bank. And finally, the credit card company, that oversees the whole process.
Coordinating chargeback management for all these players requires a tremendous amount of administration. And credit card companies estimate that these admin costs should be passed on to you, the online business, at a rate of $20 -50 per chargeback.
But that’s not all. Because of all the time and effort lost to processing and fighting the requests, it’s estimated that every dollar lost to a chargeback costs merchants $2.40. This means a $100 chargeback can result in losses of more than $240 due to the extra fees.
And to make matters worse, card companies like Visa and Mastercard are imposing stricter guidelines on the amount of chargebacks businesses can be subjected to. Those whose customers initiate too many disputes, regardless of the chargeback reason codes, can put you on high-risk lists, or even barred from accepting payments with certain cards altogether.
How Bad is the Problem?
Unfortunately, it’s difficult to come across hard data about chargebacks. This is simply due to the fact that issuing banks and card networks refuse to publish essential statistics. Merchants are just as hesitant to give specific numbers.
One thing is for sure, the challenge sees no sign of slowing down – especially when you look at the growing rates of friendly fraud, estimated to cost businesses $1B by 2023, according to the Ethoca and Aite Group Research.
Why Buyers Request Chargebacks
While some banks do initiate chargebacks automatically if they notice suspicious activity, there are typically three broad reasons why a buyer would want to process a chargeback:
- Merchant error: shipped wrong item, forgetting a discount, or technical mistake…
- Clear fraud: card details have been stolen by fraudsters who purchased goods without the original cardholder’s authorization.
- Friendly fraud: also known as chargeback abuse or liar buyer. This is the fastest growing challenge in the world of chargeback reduction, estimated to account for 60-80% of all requests.
Understanding Friendly Fraud
Friendly fraud can further be broken down into three specific kinds. You have innocent or accidental requests, when the buyer genuinely did not remember making the purchase, or when a family member used their card without authorization.
Children making in-app purchases without their parents’ consent is a great example, which is why this kind of friendly fraud is sometimes known as family fraud.
Then there’s opportunistic friendly fraud, where a customer initiates a chargeback to protest a store policy (offering travel credit instead of a refund, particularly popular in the COVID-19 era), or simply regretting their purchase.
Finally, there’s malicious friendly fraud, where buyers aim to exploit the chargeback process to gain an item without paying for it. This crosses over with standard fraud, both in terms of intention and with how you should fight it.
The Root of Chargeback Fraud
Since in this post we’ll focus on clear fraud cases, let’s first look at two examples of how a chargeback is initiated.
|Chargeback due to credit card fraud||Chargeback due to account takeover|
|A fraudster acquires stolen credit card numbers. Usually bought in bulk on the dark web, but also acquired via phishing, malware or hacking.||A fraudster acquires stolen account details. Can also be bought in bulk on the dark web, or acquired via phishing, malware or hacking.|
|They create an account on your site, and use the credit card number to purchase an item or service.||They log in using the cardholder’s account, and transfer funds or make purchases for themselves.|
|The real cardholder notices the strange charge, and initiates a chargeback request with their bank.|
As you can see, step 2 is the key one here. It doesn’t matter if you are a low or high-risk business (selling high-end electronics and jewelry, digital wallet, or iGaming operator with generous bonuses). As long as fraudsters can log onto your platform, you’re targeted.
Which is why there are three places where we can concentrate efforts: the signup, login and purchase stage.
Getting to Know Your Customers ASAP
So ideally, you’d want to know more about your website users as soon as they land on your page. The question is: how much information can you gather with passive monitoring and active questions.
It turns out, quite a lot. First, there’s what we call digital footprint analysis. It’s increasingly used for credit scoring, but anyone can use the same tools to get a good idea of who the users are, especially when the data is enriched with third party databases.
- Device fingerprinting: generates browser and device fingerprint IDs, which help you track users across incognito browsing, emulators and virtual machines. Thousands of data points are collected and compared to identify bad users – even after they reinstall or update their browser.
- Email and phone profiling: a single email address or phone number can reveal useful information through data enrichment. See whether the phone number or address is valid, if the email address domain was disposable, linked social accounts and much more.
- IP analysis: one of the oldest and most trusted fraud detection methods, designed to block suspicious connections.
- Social media lookup: a highly successful technique which links email addresses and phone numbers with social activity. This helps detect highly suspicious customers who show no other signs of an online presence.
The Power of Billing Descriptors
One area where companies can drastically reduce their chargeback rates without anti fraud tools is by being more descriptive. According to a survey by Ethoca and the Aite Group Research, 96% of consumers expressed a strong preference for having more detailed transaction information.
These 20-25 characters should be optimized to include a recognizable trade name, with clear reminders of what the purchase relates to. Adding the website domain name is also useful, and so is contact info such as a phone number or social media handle.
In fact, the startup Basecamp reduced their rates by 30% simply through improved billing descriptions.
For more tricks and tips on how to dispute chargebacks.
For more information about chargebacks and fraud, this chargeback fraud prevention ebook is right for you.
Filtering Out Suspicious Purchases
This is the core of what a fraud detection solution does, and its accuracy increases with the amount of data you can collect in the previous stage.
Why? Because each transaction will be analyzed by a set of rules, which help deliver a risk score. If the score is too high, your anti-fraud solution will block it, thereby avoiding a chargeback.
If it’s a grey area, you can manually review the details of the transaction and avoid false positives and negatives. Even better: you could trigger additional verification steps instead of manually checking the details.
Finally, if it’s a low score your customer’s transaction can go through without problems, and you won’t lose out on any business.
What Are False Positives?
When protecting your business against risky transactions, some systems tend to go overboard and block too many payments. Yes, it will reduce your chargeback rates, but will also lead to frustrated customers who legitimately wanted to buy something from you.
To ensure you don’t have too many bad results it’s important to calibrate your rules – but also to ensure you can manually adjust risk thresholds. Also do be careful around fraud prevention tools that offer a “no chargeback guarantee”, as they can sometimes incur too many wrong results.
You can read more about the pros and cons of micro fees Vs chargeback guarantee when choosing your fraud prevention system.
Scoring Risky Transactions
A lot of chargeback fraud prevention hinges on the quality of your risk rules. This is where having a dedicated fraud team can help a lot, but you don’t necessarily need to hire talent.
In fact, the SEON fraud prevention engine, for instance, comes with three kinds of rules you can use:
- Preset rules, tailored to your industry. So you can start seeing fraud and chargeback rates drop immediately.
- Custom rules: for those who need to tweak rules manually and experiment with different risk strategies.
- Machine learning suggested rules: feed enough historical and real-time business data to our algorithms, and SEON will automatically start suggesting rules that will increase the accuracy of your risk scores.
Customer Transaction Data and the GDPR
Some merchants might have concerns about collecting customer information and multiplying the data points they aggregate. But it’s important to remember that the GDPR, along with other regulations, makes it clear that you are allowed to collect data for anti fraud procedures.
Just ensure that the procedure is built into your terms of service, and that any third-party tools are also compliant. SEON, for instance, operates legally under GDPR regulation, and it is even ISO27001-certified, ensuring the highest commitment to the protection of sensitive data.
How Many Chargebacks Can Your Business Afford?
At SEON, we believe every business should be able to reduce their chargeback rates, whether it’s due to friendly or clear fraud. And integrating a powerful fraud prevention system into your business shouldn’t be complex, nor expensive.
Make a simple calculation how much you lose directly
And that cost is rather conservative. When you take into account the lost time and resources to fighting chargebacks, the true cost of fraud can be much higher.
And while our system has been proven to drastically reduce chargeback rates without increasing false positives, SEON’s smart and flexible reporting tools can even pull the right data to make your case against a chargeback dispute – all so you can divert time and effort towards growing your business with complete peace of mind.
To see how much SEON could save you in chargebacks, please see the two following case studies:
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Tamas is the founder and CEO of SEON and an expert in all the technological aspects of fraud prevention.