What Is Chargeback Fraud And How To Prevent It

Overview

The internet has literally changed the way businesses  do business. With an online presence a business can reach a whole new market from all over the world. As well as the benefits doing business on line comes with its problems. One word that no business owner who sells goods online wants to hear is chargeback fraud. However, with more and more people buying stuff on the internet the rates of credit card fraud are on the rise.

Chargeback fraud or refund fraud is when a  transaction is reversed or charged back to the merchant. There are legitimate ways when a chargeback can happen that does not mean it is fraudulent. There are many types of chargebacks that include a customer mistakenly paying twice, it can also happen when a credit visa card expires or even a bank processing error.

However, a chargeback becomes fraudulent when the cardholder recharges the merchant after receiving the goods with the intention of extorting money. Basically, this is stealing. They have received the product in good order however, they proceed to issue a chargeback without the intention of returning the goods received.

Whether a chargeback is legitimate or not they can cost a business in both profit and time. When a refund is made there are fees the merchant will have to pay if the customer is dissatisfied with the goods.  There is also the loss of time and not to mention the energy away from the business to win a case against a dispute especially if it is fraudulent.

Another problem with chargebacks is having too many of them can effectively shut down your merchant account and put you out of business. Therefore, it is important for businesses that process credit card transactions have a plan in place to reduce incidents of both legitimate refunds and chargeback fraud.

How Criminals Exploit The System

Fraudulent chargebacks occur because criminals can exploit loopholes in the credit card processing system in order to acquire goods and services they have no intention of paying for. One key loophole that criminals exploit is that banks will process a chargeback instantly without verifying it with merchant.

Therefore, you have the scenario of the merchants product in possession of the customer. The customer issues a chargeback and the bank or credit card company pays back the money to the customers account. Not only has the criminal have the goods they have also their money back. At this stage in the process the merchant has not lost any money, yet.

Once illegitimate chargebacks are made it is up to the merchant to prove the chargeback is a fraud. The merchant account provider will notify the merchant that a refund has been issued and the merchant must reply to the notice within a certain deadline, which is usually 10 days. If the merchant fails to reply to the notice the owner of the credit card has succeeded in exploiting the system and ripping off the merchant.

This weakness in the system is nothing new and concerns have been brought to the attention of the banks and credit card processors by merchants who are bearing the brunt of credit card fraud and chargebacks. However, banking policies have not changed or seems unlikely to change for the foreseeable future even with the rise of online identity theft and chargeback crimes in the last 8 years.

How To Reduce Merchant Account Fraud

With serious weaknesses in the payment processing system and a lack of policies to protect merchants, business owners have to take it upon themselves to reduce their risk of being ripped of by fraudulent customers. An effective chargeback fraud prevention strategy is to keep a record and file of all your sales transactions that include the following:

• sales and billing receipts
• proof of delivery
• photo of product before shipped (if possible)

Keeping detailed sales records of all your transactions will put you into a stronger position to win more cases of these illegitimate chargebacks. The key factor is proving that when customer makes a fraudulent claim they have no basis to do so. Unless the customer can prove the goods are defective in some way then, they have basis to issue a chargeback.

Off line there are other precautions you can use to avoid being conned the risk. For example, never  accept a credit card that is not signed on the back because this means it is invalid. It is always a good idea to check and compare the customers signature. If the signature on the card looks distinctively different to the signature on the receipt then you have right to be suspicious.

When the customer inserts the credit card into the card machine check that the card number that is displayed on the machines screen is the same number that is printed out on the authorization receipt. If the customer tells you to hurry up then definitely make sure you double check that the numbers match.

Related Articles

What Is Identity Theft? | 5 Ways You Could Lose Your ID

How To Protect Yourself From Identity Theft

Identity Theft Laws | Knowing Your Rights

Identity Theft Scams - 8 Scams You Need To Avoid

Identity Theft Tips - 8 Ways To Protect Your ID

5 Identity Theft Tips For College Students

Identity Theft Facebook - Is Your ID Safe

Social Security Identity Theft

Identity Theft Statistics | The Real Cost Of ID Fraud