The Ultimate Guide for Chargeback Fraud: What It Is & How to Prevent It

This article delves into the essentials of chargeback fraud and outlines early prevention strategies. We'll clarify what chargeback fraud is, explain its process, detail the crucial 180-day chargeback rule, and provide actionable steps to help you prevent such fraud in your business

What Is Chargeback Fraud?

Chargeback fraud is also known as friendly fraud, and it occurs when a customer initiates a chargeback on a legitimate transaction with the intent of obtaining a refund while still retaining the purchased goods or services. In other words, it involves abusing the chargeback process to gain a monetary benefit dishonestly.

The chargeback process is intended as a consumer protection mechanism to safeguard against unauthorized transactions or instances of fraud. 

However, in some cases, customers may misuse this process by falsely claiming that a transaction was unauthorized, that they did not receive the purchased item, or that they were dissatisfied with the product or service, even if the claims are invalid.

Impacts of Chargeback Fraud

A significant portion of chargebacks are actually 'friendly fraud,' where customers wrongly file chargebacks instead of requesting refunds from the merchant. According to Chargebacks911, about 86% of chargebacks fall into this category.

The financial impact of chargeback fraud on businesses is substantial. Digital Commerce 360 reports that it costs e-commerce merchants billions annually in lost revenue, fees, and added operational expenses.

Understanding the 180-Day Chargeback Rule

That's the 180-day window customers have to dispute a credit card transaction. It's essential to act swiftly and present compelling evidence to fight back. Once those 180 days pass, you lose your chance to challenge the chargeback.

So, stay vigilant, keep a close eye on transactions, and have a solid plan in place to protect your business from financial losses and maintain trust with your customers.

An Overview of the Chargeback Process

The chargeback process as previously mentioned can occur within a 180-day window and all the steps that occur are as follows:

1. Dispute Initiation: The cardholder contacts their bank (the issuing bank) to dispute a transaction. They provide a reason for the dispute, such as not recognizing a transaction, not receiving goods or services, or suspecting fraud.

2. Investigation by the Issuing Bank: The issuing bank investigates the dispute. If the bank believes the dispute is valid, it will initiate the chargeback process. \ The disputed amount is immediately credited back to the cardholder, and the bank will then contact the merchant's bank (the acquiring bank).

3. Notification to the Merchant: The acquiring bank receives the chargeback request and forwards a notification to the merchant. The merchant is debited the disputed amount plus a chargeback fee.

4. Merchant Response: The merchant can either accept the chargeback or contest it. If the merchant decides to contest the chargeback, they must provide evidence to support their case, such as proof of delivery for goods or services, a signed contract, or communication records with the customer. This evidence is then sent to the acquiring bank, which forwards it to the issuing bank.

5. Resolution: The issuing bank reviews the evidence once again. If it finds in favor of the merchant, the chargeback will be reversed, and the disputed amount (minus the chargeback fee) will be returned to the merchant. If the bank finds in favor of the cardholder, the chargeback stands, and the cardholder keeps the refunded amount and the issue will be resolved.

6. Arbitration: If the merchant or the issuing bank disagrees with the decision, they can escalate the dispute to the card network (Visa, MasterCard, etc.) for arbitration. The card network makes a final decision, which both parties must abide by. Note that arbitration involves additional fees.

How to Respond to Chargeback Alerts and Handle Disputes?

Additionally, maintaining open and constant communication between your customer support team and your customers is crucial. Keep detailed records of all interactions. Some chargebacks might be due to customers intending to commit fraud, while others might file a chargeback out of frustration from a negative experience, even if they received the promised goods or services.

Educate your team on how to respond

Your team should also know the chargeback codes so when they receive the alert they know how to properly respond. Chargeback codes depend on the network in which the transaction was processed. 

For example, the chargeback codes for Mastercard will be different than Visa. Some specifically are identified as Fraud while others can be legitimate. You can research and study what the codes mean here on the Chargeback Gurus reason code database to learn more.

How Does MoneyHash Help You Prevent Chargeback Fraud?

As a PSP tool for payment orchestrations and not limited to chargeback fraud, MoneyHash has several features and capabilities that help you prevent chargeback fraud. In the next section, we will discuss MoneyHash's ability to optimize payment routings and seamlessly monitor transactions for you.

• Prevent Chargeback Fraud with MoneyHash Optimization and Routing

  MoneyHash's routing and optimization allow you to control customer payment paths to prevent chargebacks from occurring in the first place. If a specific type of customer on a certain provider is resulting in more fraud than the others you can route them to another provider to reduce the amount of chargebacks.\ You can also input custom data attributes based upon your business logic to handle high-risk customers based on your internal business logic and route them to the correct payment method or outcome that you prefer.

• Identify Chargeback Culprits with Risk Rules

  MoneyHash has risk rules that you can apply, and integrate with your routing to prevent high-risk customers from attempting a transaction.

• Monitor and Analyze Transactions with the MoneyHash Dashboard

  Don’t worry about logging into many systems to check the status of transactions and look out for chargebacks. The dashboard allows your team to get an overview of all transactions occurring in one place and keeps your records well organized in case you need to respond to a chargeback. 

  With the MoneyHash dashboard, you are less likely to let something slip through the cracks with the ability to search and filter all your data in one place.

• Standardized and Aggregated Data

  Connecting your customer and transaction data across all of your typically fragmented PSPs through MoneyHash enables you to conduct analysis and build better profiles for transaction flows and/or customers who are likely to commit chargeback fraud. 

  You can feed this data into specific 3rd party fraud tools in a standardized manner using fewer data pipelines and engineering resources to conduct extract transfer load (ETL).

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FAQs:

What is chargeback Fraud?

Chargeback fraud is also known as friendly fraud, and it occurs when a customer initiates a chargeback on a legitimate transaction with the intent of obtaining a refund while still retaining the purchased goods or services.

What Is the Chargeback Process?

1. Dispute Initiation

2. Investigation by the Issuing Bank

3. Notification to the Merchant

4. Merchant Response

5. Resolution 

6. Arbitration

How Does MoneyHash Help Preventing Chargeback Fraud?

• Prevent Chargeback Fraud with MoneyHash Optimization and Routing

• Identify Chargeback Culprits with Risk Rules

• Monitor and Analyze Transactions with the MoneyHash Dashboard

• Standardized and Aggregated Data