TABLE OF CONTENTSchevron_leftTABLE OF CONTENTSchevron_leftEBOOK
Are you tired of fraudsters wreaking havoc on your bottom line? Frustrated by the ease in which revenue slips away? We can help!
We’ve curated our top tips to prevent and fight fraud-related chargebacks. This all-in-one guide has everything you need to block attacks from both malicious criminals and friendly fraudsters.
Please enjoy your unlocked content below!
Frustrated or confused by fraud-related chargebacks? Looking for a simple, easy-to-understand explanation of how to manage them? Look no further. We break down everything you need to know in this guide.
NOTE: Ecommerce (card-not-present) sales are growing in popularity, but the majority of transactions in the U.S. are still card-present. Despite that fact, the remainder of this guide will focus exclusively on chargebacks associated with card-not-present transactions.
There are two reasons for our limited focus:
According to Midigator data, less than 0.30% of fraud-related chargebacks were associated with card-present transactions.
There are very few management tips for card-present fraud. Upgrading to an EMV-compliant terminal and authenticating transactions with personal identification numbers (PINs) should prevent these disputes.
If you are receiving chargebacks from card-present transactions, reach out to our team. We can discuss possible causes and solutions.
CHAPTER 1
Card brands (Mastercard®, Visa®, American Express®, Discover®, etc.) use chargeback reason codes to help explain why transactions are disputed.
Despite the fact that these transactions can be processed in a variety of ways — internet, mail, phone, etc. — each card brand has just one reason code that is used for card-not-present fraud.
| DESCRIPTION | REASON CODES |
| The cardholder claims a card-not-present transaction was unauthorized. |
CHAPTER 2
When you receive a fraud-coded chargeback, one of two threats is usually to blame: malicious fraud or friendly fraud.
Malicious fraud happens when a criminal steals a cardholder’s payment card or account information and uses it to make purchases without the cardholder’s permission. Because these transactions are unauthorized, they typically result in chargebacks.
Here are a few hypothetical examples of malicious fraud.
A criminal purchased a list of payment card information from a data breach and used Rachel’s card to buy high-end designer purses that could be resold on the black market.
A woman found Monica’s credit card lying on the floor in a restaurant and used it to shop at several different online stores.
An old roommate hacked into Ross’s account with his favorite coffee shop and used stored payment information to purchase a bunch of gift cards.
Friendly fraud happens when a cardholder uses the chargeback process incorrectly, either as an intentional attempt to get something for free or an innocent misunderstanding.
Here are some hypothetical examples of friendly fraud.
After buying an expensive pair of shoes, Janice suffered from buyer’s remorse. Rather than return the shoes to the merchant for a refund, she opted for a chargeback because it was more convenient.
Chandler forgot to cancel his gym membership before his free trial ended. When his account was charged, he called the bank to complain.
Richard didn’t recognize the business name listed on his statement and couldn’t remember buying anything. When he suggested it might be fraud, the bank issued a chargeback.
Joey was desperate to get his hands on the latest version of his favorite video game — but he really couldn’t afford it. So when his credit card bill came, Joey told the bank he didn’t authorize the purchase.
How do you manage malicious fraud and friendly fraud?
Unfortunately, it is pretty challenging to prevent friendly fraud.
Other chargebacks can be traced to very obvious causes — criminal activity and merchant mistakes. But friendly fraud is much more ambiguous. It is caused by things like beliefs, opinions, morals, regrets, fear, and confusion. It is nearly impossible to anticipate a customer’s reaction to a situation and incredibly difficult to change that reaction to something less destructive than an illegitimate chargeback.
However, there are things you can do to reduce the likelihood of friendly fraud — especially accidental cases caused by confusion — and limit the impact these chargebacks have on your business.
On the other hand, malicious fraud is easier to prevent. There are several tools and techniques that you can use to reduce the risk of unauthorized transactions.
Unfortunately, if a chargeback is the result of true criminal fraud, you shouldn’t fight it. You should accept it as a loss.
Alternately, you are encouraged to fight friendly fraud. Fighting chargebacks recovers revenue that has been unfairly lost so you can protect your bottom line.
We’ll spend the rest of this guide giving you actionable advice and tips on how to minimize the impact that fraud has on your business.
CHAPTER 3
If you can identify fraudulent activity and stop it, you can avoid the resulting chargeback.
Ideally, there would be a silver bullet for fraud and chargeback prevention — a single technique that could address all potential risks. But unfortunately, there is no one-size-fits-all solution. Instead, you need a multi-layer approach — a variety of tools and techniques used at various stages of the transaction lifecycle.
Here’s how to build an effective strategy and put your plan into action.
Note: While each chargeback prevention strategy is different, a combination of some or all of these suggestions is usually best. It’s also important to note that these techniques have different functionality, objectives, and benefits. So they don’t compete with each other — they complement one another. Rather than critique them on an either/or basis, consider how they can work together to address the unique threats of your business.
The card brands (Mastercard, Visa, etc.) provide various technologies that can be used to verify the identity of a card-not-present shopper.
The goal of these tools is to make sure the cardholder — and not a criminal — is making the purchase. If these tools reveal a fraudster could potentially be using the card without permission, you can cancel the transaction and stop the fraud.
There are three tools you can use for identity verification. The more you use, the stronger your protection will be.
Note: These tools can help detect and block malicious fraud, making them useful for preventing chargebacks. However, their real value comes into play when fighting chargebacks. We’ll explain more in the next chapter.
To reduce the risk of chargebacks caused by unauthorized transactions, you need to detect and block suspicious activity.
This means noticing red flags — indicators a fraudster is likely at work — and canceling the transaction. The following are some warning signs to watch for:
There are two ways to detect these red flags. You can manually review every transaction. Or, you can let technology do the analysis.
Technology is usually the best option. Technology can work quickly and more accurately than any human team can. It can check thousands of data points in milliseconds to identify any indicators of potential fraud.
Learn more about how criminal fraud can be detected and blocked with machine learning technology.
Kount is the leading trust and safety solution for criminal fraud prevention. Would you like to see the technology in action? Sign up for a demo.
Issuing banks can be unwilling participants in friendly fraud plots simply because they lack the insight needed to confront and challenge requests for illegitimate chargebacks.
New technology, referred to as order validation, was developed to address those shortcomings. Now, it’s easier for banks to detect and stop friendly fraud attempts.
question_answer WHAT is order validation?
Order validation technology creates a direct connection between you and issuing (cardholder) banks. This connection is used to request information and share insights.
question_answer HOW does order validation work?
You and the issuing bank work together to quickly resolve cardholder disputes.
question_answer WHY use order validation?
If an issuer can better understand the order details associated with a transaction, there is a chance to ‘talk off’ the dispute so it won’t advance to a chargeback.
Learn more about order validation and how it can help your business.
Interested in using order validation to prevent fraud-related chargebacks? Sign up for a demo to learn more!
Each chargeback you receive contains a wealth of information. If you analyze that data, you can gain valuable insights — including why the transaction was disputed in the first place. This allows you to solve issues at their source and stop future disputes from happening.
Check out these real-life use cases of how data helped reduce the risk of fraud.
A merchant analyzed chargeback data by marketing source and discovered one social media platform in particular was generating chargebacks at a higher-than-normal rate for a particular product.
Without chargeback data, the merchant likely would have put more marketing dollars into the campaign because it was converting so well. But the uncharacteristically high chargeback count proved something was wrong behind the scenes.
The merchant looked at the ad details and realized that, because the platform didn’t have an age targeting feature, they were marketing to a very young demographic which has a high propensity for friendly fraud. Switching to a different social media platform that did allow for age targeting of an older, more mature audience was all it took to reduce the risk of chargebacks.
Wanting to diversify and increase earning potential, a merchant added several new items to the store’s inventory. The new merchandise was well received by customers, but chargebacks immediately skyrocketed. The obvious conclusion was that the increase in chargebacks was related to the new merchandise. But how?
The merchant analyzed chargeback data and found that fraudsters were “running” stolen cards. They were making small, seemingly low-risk purchases to see if the accounts were still in good standing. If so, the fraudsters would then make bigger purchases, hoping those unauthorized transactions would likewise go undetected.
The new, low-price inventory was making it easy for fraudsters to get their hands on the much-desired — and therefore more carefully monitored — name-brand merchandise. All the merchant had to do was pull the new merchandise and things went back to normal.
It’s impossible to force customers to come to you with their complaints instead of engaging in friendly fraud. But you can reduce the risk that customers would have complaints in the first place, eliminating the need to reach out to anyone at all.
Use data analysis to identify the underlying issues that would incentivize friendly fraud — forgotten purchases, buyer’s remorse, confusion, a lack of communication, etc. Then address those issues at their source.
Here are some examples of things you can do to reduce the likelihood of friendly fraud:
CHAPTER 4
CHAPTER 4
Of all the claims we’ve made and tips we’ve provided in this ebook, our suggestion to fight fraud-coded chargebacks will be the hardest advice for some readers to accept.
Time and time again, we hear the following:
“Fraud?! I can’t fight a chargeback if the bank says it’s fraud!"
If those thoughts have crossed your mind, you are not alone. Nor are your feelings out of line. The obvious assumption is that a fraud chargeback means the cardholder really is a victim — fighting would just rub salt in the wound. And the card brands would never let that happen.
But the reality is, the cardholder is rarely the victim — more often than not, you are the one coming up short.
We can’t stress this enough. Just because a chargeback has a fraud-related reason code doesn’t mean it can’t be fought. You can fight any reason code — including fraud. Nothing is off limits.
If it were impossible to fight fraud-related chargebacks, the card brands would state that in their rule books. But they don’t! What they do share is more than 25 different types of evidence that are considered compelling in the fight against friendly fraud. Consider the following:
HYPOTHETICAL SITUATION | CAN YOU RESPOND? |
| The cardholder really was a victim of criminal activity, and the chargeback is recovering lost funds. | NO |
| You uncovered the fraud and already refunded the transaction. A chargeback would credit the cardholder a second time. | YES |
| Initially, the cardholder requested a chargeback because the transaction wasn’t recognized. A week later, the cardholder remembered what the charge was. Rather than contact the bank to cancel the chargeback, the cardholder called you to apologize. | YES |
| You have proof the cardholder is cyber shoplifting and falsely claimed fraud to get free merchandise. | YES |
Like we said, cardholders are not usually the victims in the majority of situations. And if they aren’t, you should respond. Remember, more than 77% of fraud-coded chargebacks were fought and won.
Not only does that stat prove friendly fraud is far more prevalent than malicious fraud, it also suggests that this is the most important chapter in the entire ebook!
Is fighting chargebacks a new task for your business? If so, there are a few introductory topics you’ll want to explore.
To start, check out how the response process can be broken down into four basic steps.
Are you convinced there is value in fighting but feel overwhelmed by everything that’s involved? Kount can help. We have services that make it easy to fight chargebacks and recover lost revenue. Sign up for a demo to learn more.
What types of evidence or documents can you use to challenge a false fraud claim?
Visa outlined the following documents and pieces of information that will be accepted for reason code 10.4 (Other Fraud – Card Absent Environment). These (and other) items can also be used for other brands.
You’ll want to collect as much compelling evidence as possible throughout the customer journey so documents will be available if a chargeback is issued.
Responding to chargebacks is an important undertaking, but it isn’t the only task associated with managing friendly fraud.
Each chargeback you receive contains a wealth of valuable information. Analyzing this data, along with your results, can give you a clearer picture of performance.
Track how many chargeback reversals you won, lost, and didn’t fight. Then break down those outcomes by metrics such as:
After you’ve collected your data and analyzed it, think about what it means in relation to your business workflows and processes.
First, identify the tactics that are working well. Keep what you can. Not only will this help you maintain a high win rate, but it will also ensure your processes are as efficient as possible.
Next, identify the strategies that aren’t achieving desired results. What needs to change? How can you improve your efforts?
Once you have identified your strengths and weaknesses, start adjusting your processes. Be sure to monitor your results and retest your outcomes. If you’ve overcompensated, adjust again.
Even if you identify a strategy that works today, it might not still be effective in a few months. Chargeback regulations and consumer behaviors are constantly changing.
In order to remain effective, you’ll want to constantly analyze and refine your processes. Keep repeating these steps so your results will constantly improve over time.
CHAPTER 5
Managing fraud is an important part of maximizing your business’s profitability, but it is easy to get overwhelmed by the process. Time-consuming, labor-intensive tasks aren’t appealing to anyone!
Fortunately, there are ways to simplify the fight against fraud.
And that’s by using technology that can both minimize risks and help you fight chargebacks from invalid disputes. With Kount + Midigator, you get exactly that — and more.
Kount’s multi-layered strategy blocks fraudsters — mitigating most fraud-related chargebacks. And when unavoidable chargebacks do happen, Midigator helps you respond to recover lost revenue.
Both Kount and Midigator are powered by decades of experience in the industry, a complete strategy, and advanced technology — providing the most accurate and effective solution for fraud management on the market.
Sign up for a demo to learn more.
