Chargeback Fraud

What is chargeback fraud?

Chargeback fraud occurs when a customer requests a refund from the financial institution they used to make a purchase, rather than contacting the merchant. There are two types of chargeback fraud, commonly known as ‘friendly’ fraud, or ‘hostile’ fraud.

What is the difference?

Friendly fraud is a type of chargeback fraud initiated by the actual customer that made the purchase. In some situations, the consumer is looking for a faster, easier solution than the merchant dispute process, and instead files a chargeback with the credit card issuer, claiming that the transaction is fraud. In more malicious scenarios, a consumer places an order with the intent of filing a chargeback after the transaction is complete. In this case, the consumer knowingly takes advantage of chargeback rules to obtain goods or services at no cost.

Hostile fraud is fraud perpetrated by a person that misrepresents themselves as a customer or cardholder with the intent of defrauding the business. These fraudsters vary in sophistication, and consist of either lone actors, or fraud rings that cooperate to commit fraud and share the proceeds. Generally, hostile fraudsters seeks to go after items with high resale value or items that are in high demand that can be quickly and easily converted to cash.

Merchants lose $3.13 for every dollar lost to a fraudulent transaction.

In addition to direct monetary losses, both friendly and hostile fraud negatively affect a merchant’s chargeback ratio, which can result in issuer fees and heavy fines.

Differentiate between ‘friendly’ and ‘hostile’ fraud

Differentiating between friendly and hostile chargeback fraud empowers merchants to develop different strategies to deal with each type of fraud. Differentiating between the two types of chargeback fraud helps merchants to address them appropriately, maintaining good customer relationships when appropriate, while reducing the impact of hostile fraud as much as possible.

Friendly fraud can often be reduced by improving customer service. Improved customer service helps reduce the number of chargebacks that are initiated due to impatient customers who misunderstand merchant procedures. Publicizing clear terms of service is also helpful, as is ensuring that the merchant information that appears on the card or bank statements is accurate and easily understood. This encourages customers to use merchant dispute resolution rather than filing chargebacks at all, helping merchants avoid costly chargeback remediation programs and revenue loss and results in more satisfied customers.

Additionally, monitoring customers for repeated chargebacks and setting preventative policies is a good practice. For example, a consumer that has claimed fraud on more than 3 orders is probably a habitual friendly fraudster and should be blocked.

Hostile fraud can be addressed in two ways: one, a reactive solution and another, a proactive solution.

The reactive solution involves creating merchant policies and rules to evaluate transactions for fraud and review suspicious orders, canceling those that are determined likely to be fraud. This process requires the merchant to establish a transaction review team to screen orders and cancel suspected fraud orders.

A proactive solution involves using a real-time decision engine that can observe user behavioral patterns, device intelligence data, and historic transactions to block fraud orders before they are placed. This approach reduces merchant resource requirements and eliminates repetitive work. However, it does require vigilance to avoid high false positives, which prevent genuine, non-fraudulent transactions and affect revenues and customer satisfaction. Merchants are usually better off partnering with a fraud prevention provider like Precognitive to manage fraud identification and prevention, applying advanced data analytics to ensure accurate determinations at critical decision points. Create a proactive prevention strategy for hostile chargeback fraud.

Best practices to identify and prevent chargebacks include:

Identify chargeback sources and triggers.

The rules set forth by payment networks and financial institutions to address chargebacks vary, depending on the reason for the chargeback. This may affect the representment process and attendant timelines, arbitration process, and more.

Layer fraud prevention technologies.

Leveraging multiple data points to assess risk of the transaction. At the most basic level, this includes using data such as Address Verification Systems (AVS), Credit Verification Value (CVV), and IP geolocation data. These are intended to verify a person’s identity at the point of transaction, by checking the billing address and physical code on the card in use. To increase effectiveness, these techniques can be bolstered with additional safeguards, such correlating IP geolocation to billing and shipping information.  Merchants may also consider automated transaction scoring, device ID, behavioral analytics and 3D secure tools, additional layers of fraud prevention that can be added to improve outcomes.

Track suspicious activity.

Tracking those customers that are potentially high-risk for committing fraud is essential to controlling fraud from the merchant POV. This involves flagging and tracking suspect activity, monitoring repeat customers – particularly those that have initiated chargebacks in the past – validating suspicious orders, and leveraging negative and positive lists.

Establish policies.

Policies regarding disputes are reactive, but a merchant can create proactive policies to deal with fraud as well. This may include a clear policy on blocking problematic, recurring ‘friendly’ fraudsters; or blocking consumers that file excessive service or fraud claims.

Precognitive Fraud Prevention

A third-party partner can be critical in providing additional support in managing and preventing chargeback fraud. A partner can provide the skills and experience necessary to successfully manage both friendly and hostile fraud, taking on the burden of fraud management and allowing the merchant to focus on growing their business.

Precognitive’s preemptive fraud prevention solution aggregates device-level data and behavioral analytics, with an advanced decision engine to identify and prevent chargeback and other types of fraud. Precognitive analyzes thousands of convergent data points to build user profiles, identify suspicious activity, and stop fraud before a transaction occurs. Simultaneous fraud detection and prevention reduces the need for resource-wasting manual intervention, improving overall security and ensuring that you stay more profitable.

Sources

1. https://chargebacks911.com/chargeback-stats/
2. https://risk.lexisnexis.com/insights-resources/research/2019-true-cost-of-fraud-study-e-commerce-retail-edition