Ecommerce Guide Into Chargeback Fraud

Online shopping popularity is ever-growing, especially during the pandemic when most people have switched to online shopping. While the increase in online sales is a great thing for online retailers, they also face an extreme growth of online fraud. The 2020 survey by the Mercator Advisory Group says that the number of disputed transactions in eCommerce will reach 33 billion cases against the overall number of transactions, which is 66 billion. 

Chargeback is amongst the main reasons for disputed transactions, so implementing chargeback prevention practices into eCommerce platforms is more in-demand than ever. But what is a chargeback? This detailed guide by Covery.ai financial security experts will answer all your questions. 

What is a Chargeback?

In simple words, a chargeback is a type of transaction dispute that triggers a reversal transaction of money from the merchant’s account back to the buyer’s credit card. Credit card owners have the right to ask their banks to recall their credit card charges if they report unfamiliar transactions in their monthly credit card transaction histories. 

In the vast majority of cases, banks agree to refund customers by initiating a chargeback against the reportedly suspicious merchant. As a result, a merchant has to refund the customer and pay the bank’s fee to cover the expenses for the process. 

Starting from the first chargeback, a business gets a particular chargeback score that is calculated with a simple formula: the total number of chargebacks per month divided by the total number of transactions during the same month. For example, a business that had 30 chargebacks per 2,000 transactions during the month has a chargeback rate of 0,015%. 

Unfortunately, it’s not that easy to make these calculations when it comes to the actual situation. All because the banks can delay chargeback processing up to the next month after the transaction took place. This means that you can expect the chargebacks from one month to be added to the chargebacks in the next month. As a result, your monthly chargeback rate will be worse than it actually is. Higher fees can apply as well. 

Chargeback process phases

If you are a customer, the whole chargeback process will most likely take just a few hours or even less than an hour. That’s not that simple at all for businesses accused of causing an eligible reason for a chargeback. If your business was requested to pay the chargeback for no actual reason, open a dispute to solve the problem faster. If you don’t open a dispute and avoid the chargeback, the following process will include 7 phases, and last from 28 to 90 days. Here are the phases:

1. One of your customers studies their credit card statement and cannot recognize one of the charges made during the month. The heads-up customer contacts the bank to dispute the suspicious charge and get their money back. 
2. The bank will quickly review the incoming claim and will most probably accept it and charge the money back from the merchant’s account. Some claims are declined, but most of them lead to consequences for the merchant in order to satisfy a customer.
3. To refund the cardholder, the bank charges a refund along with the CNP (Card Not Present) transaction cost and the processing fees. Moreover, the customer isn’t obliged to return the purchased items if the chargeback claim is accepted, which can deal extra damage to the merchant. 
4. The issuing bank reports all the information about the chargeback process to the merchant’s acquiring bank. 
5. The merchant’s bank can attempt to resolve the chargeback problem to help the merchant or accept it and send in a chargeback notification. 
6. When the merchant receives a notification, there is an option to accept and pay it or to open a dispute. A dispute should be opened only if there is documented evidence that can give the bank enough information to decide whether it was an eligible chargeback, a friendly fraud, or a criminal fraud. 
7. If the acquiring bank accepts the evidence provided by the merchant, it sides the merchant in the dispute against the issuing bank. However, if a customer of the issuing bank manages to provide stronger counter-evidence, the chargeback stands. If the merchant succeeds, the money returns back to the account. 

Regardless of the dispute result, the merchant’s chargeback rate won’t get fixed in the vast majority of cases. That’s why chargeback prevention is even more important than proper dispute handling. 

Types of Chargeback Fraud

Efficient prevention of chargeback fraud attempts requires a proper understanding of the potential chargeback fraud types and their signs. Your business can face:

• Friendly and accidental fraud – this type of chargeback fraud usually occurs when your customer makes a purchase intentionally, but can’t recognize the transaction on the bank statement later on. This is the most common cause and it’s the easiest to dispute. However, other friendly fraud attempts are more or less thoroughly planned thefts. A customer can figure out how to abuse the company’s return policies in order to keep the physical product without paying a dime for it. Intentional friendly frauds are usually the toughest as customers who perform them are usually well-prepared for disputes.
• Criminal fraud (pre-authorization fraud) – real fraudsters may attempt to make illegitimate purchases on your website by using stolen credit card numbers and login info. 

There are also legitimate disputes that are not considered fraudulent. They occur if your customer has problems with the platform and suspects it in illegitimate business practices. In this case, your company has to analyze the reasons and try to eliminate them to reduce the number of legitimate chargebacks in the future. 

Consequences of chargeback fraud (They can be awful)

If the chargeback rates of your business surpass the threshold of your acquiring bank, your merchant account will automatically get into one of the frauds or dispute monitoring systems. 

These systems are designed to encourage merchants to eliminate the reasons that cause frequent chargebacks. In most cases, the chargeback thresholds are split into levels. Here are Visa chargeback thresholds as an example:

1. Early – from 75 to 99 chargebacks per month with a 0.65%–0.89% ratio to the overall number of chargebacks.
2. Standard – from 100 chargebacks per month with a 0.9%–1.79% ratio.
3. Excessive – from 100 chargebacks per month with a 1.8% or higher ratio. 

At the early Visa threshold level, your business will receive a notification from the acquiring bank with a request to find and solve the cause of the issue. Both standard and excessive chargeback threshold levels will bring your merchant account into the chargeback monitoring program. When your company gets into the list, fees for every next chargeback can grow up to $100 per chargeback. Review fees can reach $25,000 (for Visa chargeback monitoring program participants).

You can exit the program only if you keep the chargeback rate below standard for at least 2 consecutive months. It’s very important to avoid exceeding it again as you will have to start the entire process from the ground up and pay all the fees once again. If the bank concludes that you are unable to deal with the problem and reduce chargeback, your merchant account can be terminated and the entire company can be added to the industry blacklist visible to all financial organizations. 

As for the Mastercard  Excessive Chargeback Merchant and High Excessive Chargeback Merchant programs, you need to:

• exceed 100 disputes per month and reach the 1% chargeback rate to get into the list of the chargeback program participants.
• exceed 1,000 disputes, $50,000 or more in disputed transactions, and a 5% or higher chargeback rate to get into the fraud program. 

Best Chargeback Fraud Prevention Practices

Chargeback prevention is essential even if your chargeback rate is very low as the issues may snowball over time and lead to the complicated consequences listed above. Your company should implement one or all of the practices below to reduce or eliminate chargebacks. 

1. Keep all the records and obtain as much information about the users as possible. This will give you more clues when something goes wrong and more evidence if it comes to opening a chargeback dispute. 
2. Always request delivery confirmation. If your customers sign the delivery sheets, they don’t have the right to request a chargeback, only a refund in accordance with the merchant’s rules. 
3. Make the refund policy as clear as possible and deliver the info to customers in the simplest format.
4. Integrate fraud and transaction management solutions and AI systems with machine learning. 
5. Always use the recognizable company name on your transaction receipts to prevent unplanned chargebacks. 
6. Remember that you have the right to resubmit unprocessed transactions to fight chargebacks. 
7. Integrate Visa Secure or Mastercard SecureCode for eCommerce transaction protection. 

Prevent and Fight

Chargebacks are nearly inevitable for modern businesses, so working on their prevention in advance is the best solution. Develop your platform to minimize any potential abuse and enable the best dispute-management system available. Protection costs will always be lower than the potential losses. 

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July 04, 2021