TABLE OF CONTENTSchevron_leftEBOOK
The Ultimate Guide to Managing Fraud-Related Chargebacks
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.
- Insights on different types of fraud and reason codes
- Tools that can help you fight fraud and chargebacks
- Step-by-step process on how to win back revenue
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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.
CHAPTER 1
Fraud reason codes explained
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
Malicious Fraud vs. Friendly Fraud
When you receive a fraud-coded chargeback, one of two threats is usually to blame: malicious fraud or friendly fraud.
Malicious Fraud Defined
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.
Stolen information
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.
Lost card
A woman found Monica’s credit card lying on the floor in a restaurant and used it to shop at several different online stores.
Hacked account
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 Defined
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.
Buyer's remorse
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.
Forgotten subscription
Chandler forgot to cancel his gym membership before his free trial ended. When his account was charged, he called the bank to complain.
Unrecognizable purchase
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.
Cyber shoplifting
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.
What to Prevent and What to Fight
How do you manage malicious fraud and friendly fraud?
What You Can Prevent
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.
What You Can Fight
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
How to Prevent Fraud & Reduce Chargebacks
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.
Identity Verification
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.
- Address Verification Service - During the checkout process, you can ask the shopper to provide the billing address associated with the debit or credit card. Address verification service compares what is provided during checkout to what is on file with the issuing (cardholder) bank. A mismatch result could indicate potential fraud. It is assumed the cardholder would know the correct billing address for the card — whereas a fraudster likely would not.
- Card Verification Value - Every debit and credit card has a card security code — a 3 or 4-digit number — printed on it. You can ask the shopper to provide this value during checkout and then send it to the issuer for review. The issuer either confirms or denies the code provided by the shopper matches what is actually printed on the card. A mismatch could indicate the shopper doesn’t have the card in-hand — for example, stolen account information is being used by a fraudster.
- 3D Secure 2.0 - If you are enrolled in 3D Secure 2.0, you can send information to the issuing bank for review. The information you send is a combination of transaction-specific information (like shipping address) and contextual information (such as the customer’s device ID or order history). The issuer uses machine learning to review the information provided and determine the likelihood of fraud. Based on the assessment, the bank can either approve the transaction or request additional information (such as a one-time password, fingerprint, or facial scan) for further verification.
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.
Malicious Fraud Detection
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:
- First-time customers
- Purchases that involve high-priced or rare merchandise
- Purchases that are over your average ticket amount
- Purchases that involve multiples of the same item
- Making several purchases with the same card but shipping to different addresses
- Purchases with rushed or express shipping
- Purchases sent to a freight forwarding company
- Shopping from an IP address that doesn’t match the geographical location
- High decline rates in a short period of time
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.
Order Validation
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.
- The customer wants to dispute a purchase or has questions about a transaction.
- The customer contacts the bank.
- The bank uses an order validation platform to request additional information such as a description of the item purchased, customer service notes, your refund policy, etc.
- You receive the request.
- Information is sent to the issuer in 1-2 seconds.
- The issuer reviews the information with the cardholder. The new insights hopefully provide needed clarity.
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!
Data Analysis
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.
CASE STUDY: Using Data to Detect Friendly 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.
CASE STUDY: Using Data to Detect Malicious Fraud
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.
Policy and Procedure Updates
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:
- Review your products or services. Make sure everything you sell is high quality. Write accurate, detailed, and helpful product descriptions so customers know exactly what they are getting.
- Write customer-friendly policies. Create policies that make refunds, returns, and cancellations more appealing than disputes. For example, you could extend your refund time limit, offer free return shipping, and share customer testimonials that attest to how simple the process is.
- Test your billing descriptor. Your billing descriptor should make it easy for customers to recognize their purchases. Use a brand name or phrase that customers are familiar with instead of a legal or ‘doing business as’ name. Check how your descriptor displays with different card brands (Mastercard, Visa, etc.) and different card types (credit, debit, etc.).
- Remind customers of recurring payments. Send notices before processing transactions associated with subscriptions. Give customers the option to cancel if necessary.
- Provide exceptional customer service. Answer emails promptly. Monitor social media and respond to comments. Reduce call wait times so customer concerns are addressed quickly.
CHAPTER 4
How to Respond to Fraud & Recover Revenue
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!
Understand the Process: Fighting 101
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.
- Know when you’ve received a chargeback. Processors use different techniques for sending chargeback notifications including mail, email, and online portals. Make sure you know which method your processor uses, and then keep an eye out for notifications — whether that’s opening your mail or logging into your portal daily.
- Collect compelling evidence. Compelling evidence is documents that are submitted with a chargeback response to prove the transaction is valid or otherwise contradict the chargeback. The more evidence you can provide, the stronger your case will be. Put a plan in place to collect as much compelling evidence as possible throughout the customer journey.
- Write a great rebuttal letter. A rebuttal letter is an introduction to the chargeback response package. It highlights the most important and compelling parts of your argument — and it is the secret behind a successful reversal. Be persuasive, clear, and professional.
- Submit your response. Optimize the response to comply with your processor’s preferences for page order, file type, and delivery method. Then send it for review before the submission deadline has passed.
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.
Record Keeping: The Data that Wins
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.
- Proof the customer has made a previous, undisputed purchase
- Proof the purchase was made by a member of the cardholder’s household
- Photographs or emails that show a link between the person receiving the purchased items and the cardholder
- The cardholder’s signature on a merchandise pick-up form or a copy of the cardholder’s ID
- Documents that prove the items were delivered to the same address approved by AVS
- Proof the cardholder accessed the merchant’s website on or after the transaction date
- Proof the cardholder was working for the company where merchandise was delivered
- Proof the shopper’s identity was validated through address verification service (AVS), card verification value (CVV) and/or 3D Secure
- A signed order form or contract
- Proof that a passenger’s ticket or boarding pass was scanned at the gate
- Proof that frequent flyer miles were earned or redeemed as part of the transaction
- Proof the cardholder made additional purchases tied to the original transaction, such as seat upgrades, extra baggage, on-board purchases, etc.
- Proof that loyalty program rewards were earned or redeemed as part of a travel or entertainment transaction
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.
Analyzing Outcomes: How to Win More with Higher ROI
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.
looks_one Monitor Your Results, and Analyze Your Data
Track how many chargeback reversals you won, lost, and didn’t fight. Then break down those outcomes by metrics such as:
- Did Not Fight – Keep track of how many chargebacks you didn’t fight. Why didn’t you fight those chargebacks? Was it for cost-saving reasons or because you didn’t have enough compelling evidence?
- Won – Identify the characteristics that are common in your winning cases. Can you duplicate that success with other chargeback responses?
- Lost – Review the chargeback responses that were lost. Why did they lose? Do you need to adjust your fight rules so you aren’t wasting resources on cases that are impossible to win?
- Amount Recovered – Keep track of how much revenue you are able to recover so you can compare it against costs and determine return on investment (ROI).
- Costs – If you create and submit chargeback responses in house, figure out how much time and money is being devoted to each case. How do your operating expenses compare to available service providers? Is there a most cost-effective solution?
- Win Rate – Win rates (the percentage of chargebacks you’ve won compared to the number you’ve fought) can help you monitor changes in success over time. Are you consistently improving?
- ROI – Monitor how much you spend and how much you recover. Do you have a cost-effective strategy?
looks_two Review Your Processes and Workflows
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?
looks_3 Adjust and Test Again
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
Making Fraud Management Easier & More Accurate
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.