Chargeback Prevention For Merchants

Fraudsters do not take holidays off and neither should your safeguards. Combating fraud and preventing chargebacks are 24/7/365 responsibilities. With the rise of fraud schemes and card-not-present (CNP) transactions continuing their climb, it is important that your business is aware of the various types of fraud and how to mitigate the resulting chargebacks.

Types of fraud:

1. Stolen card information and identity theft: Fraudsters use stolen card details to make unauthorized purchases and possibly even assume the identity of legitimate cardholders. They often use this stolen data to make card-not-present purchases online or over the phone. These transactions almost always result in a chargeback from the true cardholder.
2. Friendly fraud: Cardholders dispute legitimate transactions made on their debit or credit card. Often these disputes are due to the purchased product or service not meeting their expectations, buyer remorse (regretting an impulse buy), or simply forgetting about the transaction.

While there is no silver bullet for fraud detection or chargeback prevention, taking precautionary measures may help your business minimize costs and inventory losses. Below are red flags you should look out for to mitigate fraudulent purchases.

Red Flag Transactions

1. Larger Than Average Purchase from First Time Buyers: Pay special attention to first-time orders that are larger than your average ticket. For example, if online transactions are typically in the $100-$200 range, and an unknown buyer makes a $1,000 purchase, that could be a sign of fraud. Check the transaction for other red flags such as those listed below. If you see these, there is a higher likelihood that the transaction is fraudulent.
2. Mismatched Information: Always pay attention to address verification and CVV response codes to identify if cardholder data mismatches from the entered information. This is one of the simplest methods to identify potential fraud attempts.
3. Unusual orders: Use caution when a consumer appears to be “buying” rather than “shopping.” When consumers are shopping, they usually have specific preferences such as color and size, etc. When a customer orders several different variations of the same product with no regard for preferences, it may indicate that the items will be resold. And this can be a sign of fraud.
4. Orders made on multiple cards: Criminals often don’t know the limit or existing balance on stolen credit card numbers. As a result, they try to spread smaller authorization amounts across several stolen card numbers in order to avoid a limit decline which may raise concerns.
5. Multiple cards from a single IP address: A customer’s Internet Protocol (IP) address identifies the computer from which an order has been made. Be cautious of multiple orders from the same IP address using different customer identifiers and credit card numbers as this could indicate use of stolen data.
6. Orders via email: Criminals will sometimes try to avoid online shopping carts and, instead, attempt to order items via email instead. Beware of this as well as requests to overpay your business for an order while sending the “difference” back to the customer. In many cases the original payment will later be returned as fraud while you take a loss on the “difference” that you sent to them.
7. Orders shipped to an international address: The Address Verification Service (AVS) cannot validate non-U.S. addresses. If your business does not typically service foreign customers, use caution when shipping to addresses outside the U.S., particularly if you are dealing with a new customer or a very large order. Sometimes social media or public data searches can be useful in helping to authenticate these types of orders.
8. The shipping address is different from the billing address: Although there can be legitimate reasons for mismatching addresses such as during the holiday season or for commercial cards, these transactions may warrant further investigation. Particularly, if it is present in conjunction with other potential fraud warning flags.
9. Express shipping: Expedited shipping is very frequently used on fraudulent orders as criminals want to receive the merchandise before you realize it’s fraud and stop the fulfillment. As with disparate shipping and billing addresses, there could be legitimate reasons for expedited shipping. Confirm whether there are other red flags present in the transaction before proceeding.

Chargeback Prevention Measures

1. Educate staff: Implement fraud policies and procedures and review them regularly. Train staff to recognize red flags on card-not-present transactions or customer inquiries.
2. Use fraud detection tools: Use a combination of fraud tools that analyze transaction data upfront and will alert staff to potential suspicious transactions or card data mismatches.
3. Use multi-factor authentication: For ecommerce transactions, implement a login process for customers that includes multi-factor authentication. Accept wallet payments when possible.
4. Understand your customer patterns and purchasing history: Review customer history to identify inconsistencies or unusual patterns.
5. Establish clear return and refund policies that follow the card brand guidelines. Policies should be clear to consumers, acknowledged prior to completing a purchase, and reiterated upon order completion. This is particularly helpful tactic for preventing friendly fraud chargebacks.
6. Use clear concise descriptions for billing: If a customer does not recognize the business name on their credit card statement, they may assume the charge is fraudulent. Make sure your business name can be clearly identified on credit card statements. This is a simple, yet effective chargeback prevention tactic.

Lastly, remember It’s okay to say no or that further authorization will be required before approving the purchase. Legitimate customers will understand. Fraudsters likely will abandon the attempted purchase.