Payment giant Interswitch recently made the news as a system glitch led to a loss of ~$40 million in chargeback fraud. Incidents of financial fraud have been on the rise in Nigeria over the past four years. According to the Financial Institutions Training Centre (FITC), Nigerian financial organizations have reported a loss of ₦159 billion ($201.5 million) due to fraudulent activities since 2020, with chargeback fraud as one of the leading culprits.
Chargeback fraud is a significant issue impacting businesses of all sizes. According to a recent study by Juniper Research, the cost of chargebacks could rise to $117.47 billion this year.
Chargebacks happen for various reasons, including errors made by the business or customer dissatisfaction with a product or service. Yet, our data shows cardholders progressively use loopholes in the chargeback concept to avoid returning merchandise and seeking refunds. Con artists also use chargebacks to steal from merchants. In either case, chargebacks severely negatively impact a business’s financial health and reputation.
If you’re unaware of chargeback fraud and how fraudsters exploit the chargeback system, you won’t be able to block this revenue loophole. Keep reading for a comprehensive overview of chargeback fraud, including potent measures for risk mitigation.
What is Chargeback Fraud?
If you are unfamiliar with the term, a chargeback is a forceful reversal of transaction payment by the customer’s bank. Thus, chargeback fraud is an intentional abuse of the chargeback system for personal gain. Chargeback fraud happens when a cardholder weaponizes the chargeback system to get a refund and keep the product or service received by declaring the product or service undelivered, defective, or transaction unauthorized.
The main categories of fraudulent chargeback include friendly fraud, return fraud, digital goods chargeback, and subscription chargebacks. Below is a brief examination of these factors:
Chargeback Fraud #1: Friendly Fraud
Friendly fraud happens when a cardholder disputes a legitimate purchase by claiming they did not authorize it or that the goods/services were not as described. Some instances of friendly fraud are when the cardholder forgets about the charge or does not recognize it on the account statement, leading them to assume it was fraudulent. Generally, friendly fraud involves the cardholder receiving the merchandise and later disputing the charge, claiming they never received it.
Chargeback Fraud #2: Return Fraud
Return fraud happens when a buyer returns a product to a retailer, stating the item is defective, faulty, or unsatisfactory, even though the product is in good condition or has been tampered with or used. This type of fraud usually involves a chargeback request, especially when the retailer’s return policy is unclear or has a loophole buyers can easily manipulate. According to NRF, retailers experience $166 million in merchandise returns per $1 billion in sales and $10.40 in return fraud per $100 of returned merchandise accepted.
Chargeback Fraud #3: Digital Goods Chargebacks
Fraudulent chargeback claims for digital goods are when a customer disputes payment they made for a digital product, such as a software license or online course, after accessing, using, or benefiting from the product. Digital goods fraud is incredibly challenging for businesses to prevent since the customer may have already downloaded the product before filing the dispute, and the company may not have any way of verifying this. A consequence of fraudulent digital transactions is their appearance on secondary markets, harming sales and damaging merchant reputation.
Chargeback Fraud #4: Subscription Fraud
Subscription fraud occurs when a customer disputes a recurring fee for a subscription service, like a streaming or subscription box service, after receiving the service for a few months. The customer may assert they did not authorize the recurring charge or canceled the subscription but were still charged. Estimates suggest subscription services attract 3 to 10 times more chargebacks than other e-commerce businesses.
Preventing Chargeback Fraud this Peak Season: 5 Ideas to Consider
Although chargeback fraud strategies are constantly evolving, you’re not entirely helpless. The following section will outline critical measures to ensure the security of your revenue and business reputation.
#1: Make your customer service better than sliced bread
While offering excellent customer service may not stop scammers from trying to steal your money with chargeback fraud, it’ll ensure that actual buyers will talk to you before seeking payment reversal from their banks.
Provide accurate and feasible delivery details, pay attention to customer complaints, and resolve any issue quickly. Use automated systems like FAQ pages to stay closer to your buyers.
#2: Review your policies
Businesses with loose or extremely stringent return and refund policies are predisposed to chargeback fraud. Often, customers choose to file a chargeback instead of navigating a business’s complicated return or exchange policy. You can prevent such issues with clear and comprehensive return and refund policies and communicate them effectively to customers. See how this brand is preventing fraudulent returns and fashion chargebacks.
#3: Prevent human errors that could create a fraud loophole
Clerical mistakes, processing errors, miscommunication with customers, and inaccurate billing descriptors often lead to misunderstandings, dissatisfaction, or unauthorized transactions, which open a backdoor for chargeback fraud. These human-related issues can create opportunities for fraudsters to exploit loopholes and initiate illegitimate chargebacks, causing financial losses and operational challenges for merchants. Use thorough transaction management and effective communication to minimize such risks.
#4: Ship orders with tracking
Shipping orders with tracking helps prevent chargeback fraud by providing irrefutable evidence of delivery. The tracking information is a concrete record, proving that the customer received the purchased items. In a chargeback dispute, merchants can present the tracking details to card issuers or payment processors, demonstrating that the transaction was legitimate and the products were delivered as promised. This transparency and documentation make it difficult for fraudulent claims, as the tracking data acts as a reliable defense against false chargebacks, safeguarding merchants from financial losses and maintaining trust in online transactions.
#5: Manage chargebacks like a pro
Chargebacks are a non-negotiable part of eCommerce business, especially for subscription-based companies. As long as you sell online, you will deal with disputes, many of which will be fraudulent. Estimates suggest the growth in eCommerce attracts an equal spike in chargeback fraud.
Gone are the days when businesses manually mediated disputes, as intelligent technologies now enable scammers to automate many of their fraudulent activities, turning communications that once had to be written by manually to be more convincing. Using automated chargeback management systems like Chargeflow helps you turn every dispute into a profitable business opportunity. That includes:
- Harnessing the power of real-time dispute alerts to prevent chargebacks before they happen.
- Using AI and machine learning to excavate comprehensive order insights from multiple sources to track chargebacks, analyze root causes, and dispute fraudulent cases with maximum ROI probability.
- Forecasting working capital month-on-month, avoiding Card Scheme Monitoring Programs while accepting more transactions and reducing chargeback rates.
Chargeflow has native apps on Stripe and Shopify and integrates seamlessly with your existing technology stack.
Final Words on Chargeback Fraud Prevention
Chargeback fraud has a significantly negative impact on businesses of all sizes, with startups being more vulnerable as they operate on tighter margins. The financial losses from fraudulent transactions, coupled with chargeback fees and other associated costs, contribute to insolvency for businesses.
Frequent chargebacks also damage a business’s reputation, leading to negative reviews and social media comments that harm a business’s image and credibility. More so, dealing with chargebacks is time-consuming and expensive, diverting resources from growing the customer base, developing new products or services, and retention efforts.
Preventing chargeback fraud in today’s eCommerce requires businesses to invest in additional fraud-prevention measures like Chargeflow, which guarantees quick and efficient dispute resolution. High chargeback ratios result in penalties from payment processors or credit card issuers, and higher processing fees or the loss of merchant accounts. So, writing off disputes as Cost of Goods Sold (COGS) will only do more harm than good. Use these recommendations to improve your chargeback mediation and secure your business bottom line this peak season.
About the Author: Tom-Chris Emewulu is Chargeflow’s Digital Evangelist. With 8+ years of digital marketing & venture building experience, he crafts compelling, high-converting, high-intent, data-driven, SEO-friendly articles that help the brand build a sustainable growth engine. Forbes, DW, Business Insider, Businessss2Community, and many other publications have featured his works. You can find him on Social Media
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