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What is Chargeback Fraud?

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Nic Beique | September 16, 2021

“If a customer makes a purchase and deliberately files a chargeback under false pretences: you're dealing with chargeback fraud.”
2 min read

    Chargeback Basics

    Chargebacks are meant to allow the customer's issuing bank to return funds from illegitimate transactions back to the customer's bank account if there is sufficient reason to do so. However, if a customer takes advantage of the chargeback protections deliberately so they can benefit financially, then they are committing chargeback fraud. Chargebacks are like a refund from a customer's bank, who will then charge the merchant for the outstanding balance plus any chargeback fees.

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    What is Friendly Fraud?

    It's important to note that customers may file a chargeback due to confusion or forgetfulness and that these instances of legitimate customer disputes are considered friendly fraud, not chargeback fraud because the customer doesn't have any malicious intent.

    Chargeback Scams

    Chargeback fraudsters will make false claims for financial gain. It's important to be aware of what these claims might be and always double check the facts when it comes to any potential disputes, including card and transaction details. That way, you can spot a fraudulent chargeback before falling victim to it.

    False claims leading to chargeback fraud include:

    • Purchased item or service was not delivered
    • Recurring bill cycle was not cancelled on time
    • A transaction occurred that the cardholder did not authorize

    Now remember, all of the above examples can also be examples of legitimate disputes whereby a business incurs a chargeback, but they are used by fraudsters who lie about transaction charges in order to get "refunds" for things they never purchased.

    Reasons For Chargeback Fraud

    Unfortunately, it's been observed that consumers may engage in chargeback fraud after they file a legitimate chargeback and realize how easy it can be to get away with it. Some reasons customers may misrepresent a chargeback are:

    • Buyer's remorse and want a refund without going to a merchant
    • Wanting to get something for free

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    Protecting Your Business From Chargeback Fraud

    Here are some ways you can help protect your business from chargeback fraud:

    • If your business has recurring billing cycles for any of your products or services, be sure to notify customers before they are enrolled in, or move into, a new billing cycle.
    • Use delivery confirmation tools so you can confirm when a product is received by the customer. By requiring customers to sign to receive a package you can confirm that the item was delivered successfully.
    • Review your business's sales to look for signs of fraudulent transaction patterns to help minimize the risk of processing a stolen credit card.
    • Ensure your billing name descriptor is synonymous with your business's main brand that customers are already familiar with. If a customer doesn't recognize the descriptor on their card statement, then they may report a suspicious transaction to their card issuer.

    Final Thoughts

    Chargeback fraud is a real issue in credit card processing; especially with the increase of online shopping in today's world. However, by taking the above measures, you can help protect your business from chargeback fraud, while still allowing customers to access the credit card protections they are entitled to for legitimate issues.

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