What is chargeback fraud and how can I protect my online sales?

More and more online sellers are falling victim to mass fraudulent buying, which is becoming a huge problem in global e-commerce

If you sell products online – even on e-commerce platforms such as eBay – you could be at risk from chargeback fraud, or a variation of this which is often dubbed ‘friendly fraud’.
Other SMEs just like yours are losing billions of pounds every year because of chargeback fraud, a global phenomenon which sees fraudsters making online shopping purchases with their own credit card then requesting a chargeback from the issuing bank after receiving the goods or services.
With so-called ‘friendly fraud’, buyers claim refunds for purchased goods without returning them – claiming that the items haven’t been delivered or that the transaction was not authorised – using the chargeback process to get their money back.
According to The Chargeback Company, which helps businesses to recognise and combat fraudulent chargeback activity, part of the problem is that there aren’t sufficient technologies available to detect legitimate fraud.
Protecting sellers from chargeback fraud
While previous studies have focused on the notion that buyers are subject to opportunistic sellers, new research from King’s Business School in the US – carried out in partnership with Hohai University, the University of Alabama and Kent State University – has flagged up an urgent need to protect sellers from the fraudulent behaviour of buyers.
The School’s Professor Stuart Barnes and his co-authors have created a conceptual plan designed to reduce the huge losses online retailers suffer from chargeback fraud.
Barnes explained: “With vast numbers of SMEs selling products and services online to buyers all over the world, Chargeback fraud has become a growing and massive problem in global e-commerce. Billions of dollars are lost every year, yet existing research has focused on the notion that buyers are subject to opportunistic sellers.”
Barnes and his team recommend lobbying and putting pressure on financial institutions to reduce lengthy chargeback periods. As part of the current set-up, buyers can contact their banks to exploit a credit card protection policy which allows them to reverse charges for many months if they’re not satisfied with the ordered items.
They developed and tested a model which identifies a set of operational measures to enhance sellers’ trust and reduce their perceived risk – based on a survey of more than 400 online sellers on DHgate.com, one of the major cross-border e-commerce websites connecting SMEs in mainland China with overseas buyers – by generating greater transparency of a buyers’ identity through signature mechanisms, such as smartphone fingerprint apps, and more effective tracking of goods in transit.
Barnes says this is particularly important because, unlike face-to-face transactions in store where the credit card institutions take full responsibility in disputes, an online merchant is held accountable for the loss of delivered items despite measures taken to verify the transactions.
What can I do to protect my business from chargeback fraud?
The Chargeback Company suggests the following steps in the meantime and has a free guide outlining 35 step-by-step chargeback prevention techniques available to download from its website.
  • Employ business best practice
  • Use Address Verification Service (AVS)
  • Request card security codes
  • Sign up for 3D Secure
  • Improve customer service
  • Identify and tackle threats early
  • Balance security with customer experience
  • Manage recurring payments
  • Address potential issues associated with shipping
  • Talk about delays and discontinued merchandise
  • Use delivery confirmation
  • Create a blacklist to ban known fraudsters
  • Check billing descriptions
  • Monitor the sales of digital goods
Creditcards.com also has some great tips for small business owners – click here for 8 steps to fighting chargeback fraud
You might also like: Friendly fraud vs chargeback fraud: Knowing the difference is paramount
The good news is that revenue lost to chargeback fraud and friendly fraud is recoverable, while revenue lost to true fraud is not.*
*Source: chargify.com
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