Credit card chargeback fraud is a persistent problem for
merchants and can be hard to detect. But there are ways
small-business owners can fight back.
include cases of identity theft and so-called "friendly fraud," in
which a customer deceptively says a product or service was never
ordered or was not delivered. Friendly fraud accounts for 18
percent of all merchants' fraud cases, according to the
2014 LexisNexis True Cost of Fraud Study
Usually, you won't hear from the customer if they're committing
friendly fraud, says John Monarch, CEO of Direct Outbound, a
Greenville, South Carolina, call center firm that provides
chargeback dispute services. Many customers go straight to their
card issuer as a matter of convenience, whether their chargeback is
a result of someone misusing their credit card, friendly fraud, or
even incorrect chargebacks that are a result of not recognizing the
2014 survey by Trustev
found that 17 percent of U.S. consumers have disputed charges
without contacting an online merchant, and 7 percent admitted to
lying about the condition of a product so they could return it for
If chargeback fraud goes unchecked, the consequences can be
severe. Too many chargebacks could prompt your acquiring bank to
terminate your account. That could make it almost impossible to get
a new account, according to Tim Russo, fraud prevention team leader
at cleverbridge, an e-commerce technology firm in
Russo says card associations use a database known as MATCH,
which stands for Member Alert to Control High-Risk Merchants
previously known as the Terminated Merchant File, or TMF). The
system is used by MasterCard and Visa processing banks to identify
merchants that have had their accounts terminated. Once a merchant
is on this list it is highly unlikely that future merchant account
applications will be approved. "The TMF, or MATCH list, is
essentially a blacklist from which it is almost impossible to be
removed," says Russo.
Determining whether your business has a chargeback fraud problem
can be tricky. However, there are several important signs that
fraud is an issue, as well as some smart ways to prevent it -- or,
at least, fight it when it happens.
1. Understand your risk.
Merchants who do business online are at particular risk of
chargeback fraud because they are not able to see the credit card
being used or check a customer's identification or signature, says
Monarch. As a result, it can be easier for fraudsters to use stolen
credentials to order merchandise online. In addition, because the
merchandise is often shipped without a signature required for
delivery, it can be easier for friendly fraud perpetrators to claim
the product was never received.
The problem is growing, too. The LexisNexis study found that 51
percent of the fraud experienced by merchants who accept online
transactions comes from the online channel, compared to 42 percent
Knowing that you're more vulnerable to risk gives you an
indication that you need to be more vigilant about verifying what
you can and tracking fraud overall, Monarch says.
2. Flag verification issues.
Erik Van Riper, founder of Build the Store, a San Fernando,
California, online business that builds e-commerce platforms for
other companies, says preventing fraud requires using all possible
verification components when fulfilling a transaction. If the card
is present, ask for identification. If it's not, you need to take
"One thing that we insist on for any credit card transaction is
that the billing address matches the credit card billing address.
The shipping address can be different, but we insist that at least
the knowledge of the billing address is there, and correct," he
says. If the purchaser can't provide this verification, the
transaction is not approved.
3. Look for unusual activity.
From there, Van Riper recommends monitoring transactions for
unusual activity, such as orders for high volumes of product or for
many expensive items of the same type or brand. Review the location
of the transaction. If the billing address is in New York and the
customer is shipping to a place in Oregon, you may wish to further
verify the transaction by contacting the customer. Set a threshold
-- say, $100 -- and require a signature on the package for any
shipment valued at more than that amount, he recommends.
4. Examine notification codes.
When you receive a chargeback, it will have a reason code. Each
code, which varies by card network, will indicate the reason for
the chargeback, such as "counterfeit magnetic stripe" or "fraud,
card not present environment." Once you have the code, investigate
the transaction to spot irregularities, says Russo. Were there
missed indicators that this was a fraudulent transaction?
5. Review nonfraud chargebacks and declines.
Don't just scan your reason codes for fraud. Investigate other
reason codes and your decline rates, Russo says.
High decline rates may signal a problem with attempted fraud.
But some codes might indicate customers don't recognize their
transactions, he says. If you see those codes regularly, it could
mean you need to work with your credit card processing company to
clarify the descriptor that appears on customers' credit card
statements. It's also a good idea to include a telephone number on
the descriptor, if possible, so customers can easily contact you if
they have questions about charges.
The bottom line is to track the reasons for your chargebacks and
try to take steps to remedy them. If you're not tracking this data,
you could have a problem before you even know it. "Tracking
customers that have charged back is usually a good idea, because if
it was a case of 'friendly fraud' there's the chance that it will
be done again," Monarch says.
6. Make your case
If a chargeback has been filed, the bank will ask for all records
you have verifying that the order is real. Be sure to provide those
in a timely manner, Monarch says. They may include terminal
records, signatures and any other information available for
in-person transactions. Online transaction backup may include
address verification and CVV verification, IP address information
that coordinates with the purchaser's address, and product delivery
records with delivery confirmation showing the customer received
Monarch says it's usually not helpful to try to contact the
customer if they have already initiated a chargeback. "The
chargeback is on record against you at this point," he explains.
"Even if you win and get your money back, it still counts against
your merchant account for the month.
"The best plan of attack, if it's already filed, is to simply
gather as much data as possible, write up a detailed document
regarding how one purchases your product or service, and submit all
of this to the acquiring bank, which will have mailed or faxed you
a chargeback letter," he says.
7. Get your data.
At MasterCard, the central repository for fraud data is the System
to Avoid Fraud Effectively (SAFE), which supports fraud prevention
programs and security efforts, Russo says. All MasterCard issuers
are required to report fraudulent transactions to SAFE at least
monthly. SAFE then generates reports for both issuers and acquirers
and provides data for other security and risk management programs,
as well as merchant audit programs.
Your credit card processing company likely has access to this
data, Russo says. Asking your processor for as much of that
information as possible may be helpful if you have a series of
fraudulent transactions of less than $30 (the threshold at which
you are typically notified) that are caught before they get to you.
He admits it can be hard to get a full accounting of this type of
activity, but the more volume you do and the better relationship
you build with your processor, the more likely it is to help
8. Work with your processor.
Russo, who has previously been employed by two processing
companies, says these firms may have additional resources to help
you combat fraud, such as suggestions for enhancing security and
advice on how to better verify transactions. Stay in touch with
your processing company to ensure that you're adopting the latest
and best practices to prevent fraudulent transactions, he says.
Spotting chargeback fraud can be tricky, but by knowing where to
look and using that information to improve your operations, you can
stave off losses. It's not a one-and-done activity, though. Small
businesses must be vigilant to minimize chargeback fraud on an
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