What is Chargeback Fraud?
Chargeback fraud is another name for friendly fraud or first party misuse in payments to merchants. It is a category of chargebacks that are initiated by a legitimate customer who unfairly files a payment dispute with a merchant after they have received the goods or service and the conditions of the transaction have been met.
These customer disputes stem from a cardholder’s desire to get something for nothing, forgetting they made a purchase or buyer’s remorse. Sometimes, chargeback fraud occurs after a cardholder has tried to obtain a refund from a merchant, but they failed to meet the returns deadline or other conditions.
Estimates for the size of chargeback fraud vary but the highest reach $125 billion a year in lost revenue for merchants.
Chargeback fraud should not be confused with a fraud chargeback, which is a payment dispute that is initiated by a cardholder claiming that an unauthorized third-party used their credit card details to make a purchase. A fraud chargeback can be a case of chargeback fraud, when the cardholder claims a charge was unauthorized, while in fact it was approved by them.
What’s with the name
The more common name for chargeback fraud is “friendly fraud,” which was chosen as the preferred nomenclature at a merchants association meeting in 2010. That term derives from the military expression “friendly fire,” whereby a soldier or unit fires on the “good guys” as opposed to the usual “bad guys.”
This year, the Merchant Risk Council in conjunction with other industry stakeholders declared a shift towards the term “first party misuse” as more accurately conveying the nature of the problem. The word misuse is preferred to distinguish true fraud perpetrated by criminals and the more humdrum misrepresentations and abuse of the chargeback system by regular customers looking to recoup their money while sidestepping the normal refund process.
Reducing chargeback fraud
There are some basic steps a merchant can take to reduce the incidence of chargeback fraud.
Set a transparent and understanding return policy
A return is several times less expensive to deal with than a chargeback. A simple and flexible return process will reduce issues with buyer’s remorse and help cut down on chargeback fraud.
Invest in a strong customer care team
A customer service team that responds rapidly and empathetically to inquiries and complaints will make customers feel that their voice is heard. They are then likely to allow more time and leeway for the resolution of issues before filing a chargeback. For some businesses, like those that employ a subscription model (i.e. recurring billing), good customer service is crucial for turning potential chargebacks into refunds or even saved sales. It can’t be emphasized enough how important this bullet point can be for preserving your chargeback ratio.
Ask for delivery confirmation
Winning chargebacks cases comes down to having compelling evidence. Few things are as strong as a signed delivery by your customer. Not only will having the confirmation help you win cases once a chargeback is filed, it should also help deter clients from filing illegitimate claims in the first place.
Fight chargeback fraud with Justt
Over 80 percent of payments disputes involve chargeback fraud. At Justt we specialize in handling these cases for merchants so they can focus on running their business.
Our customized solution uses machine learning technology in conjunction with human experts to achieve the best success rates in the industry. Our success-based fee means that you use us with zero risk to your bottom-line. Contact us to find out more.