How to deal with fraudulent Shopify chargebacks in 2023

How to deal with fraudulent Shopify chargebacks in 2023

Anyone remotely acquainted with Shopify knows they take chargeback issues seriously –so much so that they frequently clamp down on merchants with high chargeback rates. 

Chargebacks are the worst. 

Every time a cardholder files a chargeback, you will lose money. And the vicious cycle affects the entire eCommerce value chain.

Case in point, Union54 forced a group of African fintechs such as Flutterwave, Eversend, Busha, GetEquity, and Payday to suspend virtual card services due to an unprecedented chargeback fraud spike last year.

So, what in the world are these chargebacks? Why do chargebacks happen? And how should you deal with fraudulent Shopify chargebacks in 2023?

Read on for all the best insights.

What is a Chargeback in simple terms?

A chargeback is simply a forced payment reversal by the cardholder’s bank.

Chargebacks are a consumer protection instrument instituted by U.S Federal law to help consumers seek remediation for unjust, unauthorized, or fraudulent billings on their cards.

The history of chargebacks dates back to the 1970s.

In the early days of credit cards in the 1960s, consumers were sceptical about adopting card payment. They feared someone could steal their cards and use them to make unauthorized transactions – ramp up bills for them to pay. They also argued about the possibility of unscrupulous business practices by merchants and lenders resulting in overcharges.

Between 1960 and 1968, lawmakers and merchants designed different instruments to alleviate some of these fears, particularly for U.S. buyers. The first is the Truth in Lending Act of 1968 (TiLA). TiLA mandated lenders to issue precise loan cost details to buyers, which gave birth to concepts like annual percentage rate (APR), loan term, and total costs to the borrower. With that, customers know what they agreed to upfront.

But it wasn’t enough. While TiLA alleviated the predatory lending burden for customers, card fraud continued unabated. 

Hence, in 1968, IBM came to the rescue with a product that encodes cardholders’ information on a magnetic stripe attached to a plastic on credit cards. Identity verification became faster, and merchants had a reliable instrument for combating card fraud.

But that didn’t resolve the fear of unauthorized transactions due to either entity theft or card loss and unfair billing practices. Hence, the consumer protection agency lobbied for congress to pass The Fair Credit Billing Act, or FCBA act 1974. FCBA brought in the chargeback mechanism to address these stated challenges.

While the chargeback construct is fantastic in principle, the practical application procedures make it advantageous for con artists.

How to deal with fraudulent Shopify chargebacks in 2023

How scammers weaponized chargebacks

Before we unravel the intricate details of why cardholders file chargebacks today, it’s crucial to shed some light on how chargebacks opened a floodgate for card fraud. And why chargebacks will constitute an estimated $117.47 billion cost for eCommerce merchants this year.

 After more than forty years of FBCA, the eCommerce revolution came onto the scene, disrupting the traditional business landscape.

As commerce migrated predominantly online around 2010, and consumer behaviour began to align with the new transformations, additional challenges popped up.

First, data breaches became rampant, leading to identity theft and eventual unauthorized transactions. And then there’s the complex chargeback application process. 

Developments in eCommerce have since outpaced policy evolution, creating gaps and disconnects in dispute remediation processes. For example, chargeback reason codes help merchants know why customers file a dispute.

Chargeback mediation protocols require that a merchant tailor their compelling evidence to these codes to stand a chance of winning the dispute. Yet, most times, the alphanumeric codes do not reflect the actual reason for the dispute. 

Read also: Here is all you need to know about Union54, chargeback fraud and the USD virtual card palava

Either the cardholder intentionally chooses something else, or the many steps of information flow from the issuer to the processor to the merchant causes significant distortion that leaves gaps. Instead of overextending themselves to plug the gaps, what happens is that once a cardholder files a dispute, banks see the merchant as guilty until proven innocent. After all, with every chargeback, banks earn administrative fees. And online shoplifters know that. 

So what we see in the industry today is a growing weaponization of the chargeback mechanism. 

That’s not to say that all chargebacks are fraudulent, though. However, research shows that 80% (or more) of all chargebacks are friendly fraud. And 40% of fraudsters who succeed in a chargeback will try it again within 60 days.

That brings us to the burning question:

Why do consumers file chargebacks on Shopify, and how can you address them?

There are three main reasons cardholders file chargebacks.

  1. Actual fraud: This happens when a fraudster acquires the credit card numbers of an unsuspecting consumer on the dark web and begins to make unauthorized transactions.
  2. Friendly fraud: Friendly fraud is a fancy pant’s name for an (intentional or unintentional) abuse of the chargeback system where the legitimate cardholder makes a transaction, receives the order and then initiates a chargeback. For instance, the liar buyer may say they never authorized a specific transaction. Or the order didn’t arrive.
  3. Merchant error: Avoidable internal errors such as poor checkout, order fulfilment, and shipment errors can also attract buyers’ wrath. Many of these disgruntled cardholders seek remediation through their bank. 
How to deal with fraudulent Shopify chargebacks in 2023

Again, Shopify chargebacks can have a detrimental impact on your online store. Each chargeback you receive means you will:

  • Pay a chargeback fee to Shopify
  • Lose the transaction value, which often cannibalizes sales as merchandise turns up in secondary markets
  • Waste enormous time with the dispute resolution process
  • Face reputation damage
  • Potentially pay more fees to card processors or issuers

Worse, if your chargeback ratio exceeds 1%, you face hefty transaction fees on every payment. And you could get blacklisted if your chargeback issues get excessive, meaning you cannot accept card payments anymore. Digital goods merchants and sellers in high-risk verticals or regions face a higher risk of shutdown.

How to avoid Shopify chargebacks

Bearing in mind that merchant missteps contribute to chargeback frauds, here are standard housekeeping rules to note:

  • Ship orders with tracking to help customers know the status of their orders at all times. 
  • Order shipping delay is one key trigger for “item not received” chargebacks. Pre-empt that with prompt shipping.
  • Put yourself in your customers’ shoes. Are you communicating clearly? Are you responsive and helpful to your buyers? Excellent customer service makes it easy for buyers to talk to you before contacting their bank.  
  • Craft requisite refund and return policies to ensure your buyers know what constitutes a sales final and how to reach you for any order issue. And make sure they can find your policy as well.
  • Walk yourself through your order funnel: Is your product description straightforward to avoid the expectation gap? Do you have product pictures from multiple angles?
  • If you sell digital products, ensure your back office is structured and organized for excellent record keeping. 
  • And do use anti-fraud and Address/Identity Verification tools to fend off online shoplifters.

Unfortunately, while those precautionary measures help minimize your chances of getting chargebacks on Shopify, you can’t possibly stop all chargebacks. No matter how hard you try. So you must be ready to fight back when scammers force their way with false Shopify disputes.

How to handle chargebacks disputes in your Shopify store

When a customer files a chargeback in your Shopify, you can do one of two things:

  1. Accept the chargeback.

If you believe the buyer has a solid case, for example, you billed them twice for the same transaction, you can accept the dispute.

To accept a chargeback:

  1. Log in to your Shopify admin dashboard and visit Orders;
  2. Reject the chargeback and fight back.
  3. Locate the disputed order and click on Submit response in the chargeback banner;
  4. Select Accept chargeback at the Chargeback response page;
  5. Then Submit response.

Suppose someone is trying to play a fast one on you; writing off the dispute as “a cost of doing business” will only create room for the cycle to continue. You must represent and fight to recover your money. 

With Chargeflow’s automated chargeback solution, you can pull evidence from over 50 data points connected with the order and submit the most compelling documentation to win the dispute on autopilot.

But if you haven’t automated your chargebacks, you must respond to the case quickly to avoid loss-by-no-contest. As we noted earlier, you must provide sufficient documentation in the appropriate format to overturn the dispute.

How to deal with fraudulent Shopify chargebacks in 2023

How to respond to chargebacks on Shopify

Shopify acts as your middleman in collecting evidence and transmitting them to the issuer when a cardholder files a dispute. 

Sometimes, Shopify will send you an “inquiry” for more details on the case, not an outright chargeback notice. To view orders with either a chargeback or inquiry:

  1. Filter through orders from your Shopify admin dashboard;
  2. Click on Chargeback and inquiry status at the Select a filter drop-down menu;
  3. Select “open” at the Select a value drop-down menu; 
  4.  “Add filter” to view inquiries and chargeback details.

Having said all that, use the following guide to add compelling evidence in your Shopify chargeback response. 

  1. File attachments must be in PDF, JPEG, or PNG format.
  2. Ensure PDF files are PDF/A compliant and merge multiple PDFs into one file. And make sure each PDF file is less than 50 pages.
  3. Crop the file to retain high contrast and legibility for image files and use arrows or callouts to highlight essential details.
  4. Make sure each evidence file is not more than 2 MB, and your combined evidence files must not exceed 4 MB. Also, only submit one file per evidence type; merge multiple files per evidence type into one image or PDF file; and remove any audio or video file –and links to external assets or callback requests/emails.

To submit your evidence:

  1. Locate the disputed order form to your admin dashboard; 
  2. Select Submit response at the chargeback banner;
  3. Add your compelling evidence at the Chargeback response page, and upload vital files as noted above;
  4. Crosscheck your response and choose  “Submit response.”

What types of evidence should you submit for a Shopify chargeback?

The chargeback reason code provided by the cardholder’s bank determines the type of evidence you can submit to support your case.

A few examples are as follows:

  1. Ancillary order details include sales receipts, customer communications, transaction date, and transaction amount.
  2. Order delivery confirmation showing you delivered the item to the same address for which an AVS match is the same.
  3. Device’s geographic location during the transaction, IP address, device’s ID number and name, proof of customer profile activation and confirmation before the disputed transaction date and time, if applicable, to show the customer accessed the digital goods.
  4. If the buyer returned the products or requested an exchange, you can include proof that you attempted to resolve any issues with the buyer.
  5. If you provided a refund to the cardholder, submit evidence of the refund to show you attempted to resolve the dispute.

The caveat here is that the specific documentation you need to submit may differ depending on the circumstances of the chargeback and the policies of the customer’s card issuer or payment processor. Review the specific requirements and any available policies from the bank or card network before submitting your chargeback response. 

But then again, since the manual chargeback representment process yields only a 12% success probability, your best bet is to automate your disputes and raise your chargeback recovery odds to at least 75%.


Content Marketing Manager at Chargeflow.

This article was contributed by Tom-Chris Emewulu, Chargeflow’s Digital Evangelist. With 7+ years of digital marketing experience, he crafts compelling, data-driven SEO articles that put brands on page 1 of Google search. Forbes, DW, Business Insider, Businessss2Community, and many other publications have featured his works. You can find him on Social Media via @tomchrisemewulu.

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