So, your merchants came back to you to ask why their estimated profits are steadily declining. Why their actual profits are way lesser than their projections?
Before suggesting the next steps, you check their account statement to realize that a couple of their customers have filed chargebacks against their deliveries. You come to the conclusion that the merchants are victims of friendly fraud. What do you do?
A previous blog covered the critical details of fraud prevention and detection for faster payment systems. This blog explains the different types of chargebacks, friendly frauds, and how to prevent them.
What are Chargebacks?
A chargeback is a paid amount returned to the payer, a debit/credit cardholder, in case of a disputed transaction. Let’s understand this with an example.
A consumer purchases a sofa set from an online furniture store for $1500 via a debit/credit card transaction. After delivery, the consumer realizes that the sofa set is not up to the correct quality standards or is generally not satisfied with the purchase. Now, the consumer can request a chargeback from the card issuer on account of an unsatisfactory product. After assessing the situation, the card issuer processes the chargeback, canceling the transaction and moving the money back from the merchant account to the customer account.
Visa, Mastercard, American Express, and other card issuers usually have strict guidelines around chargeback policies and entertain specific requests only. Learn about the chargeback policies of the top card issuers below:
Types of Chargebacks
The merchant delivered a subpar product/service, or the customer had unrealistically high expectations. Card issuers generally classify merchant error chargebacks in gray areas. Avoiding these chargebacks is challenging and involves a lot of back and forth between the consumer, card issuer, and merchants.
This type of chargeback is a conscious attempt to steal from the merchant. The card issuers rule such frauds in favor of the merchant and do not process the chargeback request.
We will discuss friendly fraud chargebacks in detail in the next section.
Merchant fraud is a conscious attempt by the merchant to steal from the customer. A merchant may commit fraud by delivering defective products or promising specific results and not delivering up to the promised standards.
Such fraud/chargebacks are committed neither by the merchant nor the consumer but by a third party. They usually include personal information or card theft to carry out unauthorized transactions.
Chargeback abuse is prevalent in some industries. In such a chargeback scenario, the customer intentionally carries out a card transaction to cause financial loss to the merchant or turn a profit by unfair means. An example of such a chargeback includes customers ordering products online with an intention to file a chargeback even if they received the product in perfect working condition. Customers initiating such chargebacks often cause payment disputes and misuse their privilege as a cardholder.
How Can Merchants Prevent Chargebacks?
Chargebacks are unnecessary costs that slow down business. Thankfully, fintech companies and payment processors have technologies that help with chargeback fraud prevention. Here are a few ways merchants can prevent chargebacks:
- Leverage Account Verification/Validation Tools
- Use Check Verification Technologies
- Implement Identity and Address Verification Systems
Apart from identifying and minimizing fraud, the merchant should double-check all important transactions before processing them. A merchant should ideally inform the card issuing bank and payment processor within the time limit after detecting a fraudulent chargeback transaction. Immediate action gives the merchant the upper hand while handling customer disputes.
What is Friendly Fraud?
Customers cause a friendly fraud, aka a friendly fraud chargeback, when they file for a chargeback for a legitimate transaction, either accidentally or deliberately, instead of trying to get a refund the usual way. Friendly fraud is a type of chargeback activity. There are primarily two types of friendly fraud cases that merchants regularly encounter:
Accidental Friendly Fraud
Customers might cause an accidental friendly fraud in the following ways:
- They fail to recognize a recurring autopay bill they signed up for
- They requested a refund, but the process took longer than expected
- They forgot about the purchase
- They wanted to apply for a refund but mistakenly applied for a chargeback
- They wanted to understand a chargeback reason code, but the card network misinterpreted their request and initiated a chargeback
Intentional Friendly Fraud
Customers might cause an intentional friendly fraud in the following ways:
- They falsely accused the merchant of delivering a faulty or sub-par product/service
- They falsely accused the merchant of late delivery
How to Prevent Friendly Fraud?
Banks often go through the customer’s historical transaction bank account data when they request a chargeback to ensure that they are not misusing the system. Typically, the card issuers have an incentive to take the customer’s side in a chargeback dispute to keep them happy. However, if the banks find that the customers are misusing their credit cards, they take the necessary actions against them. Learn more about the consequences of a deliberate friendly fraud for consumers.
Merchants are typically the ones that suffer the most losses in friendly chargeback fraud. Here are some ways they can avoid such fraudulent behavior:
- Leverage Technologies
- Chargeback Representment
- Establish Open Communication with Customers
- Notify Customers of Recurring Payments
- Get Signed Delivery Confirmation for Large Orders
- Keep Track of Refunds and Cancellations
- Loss of Goods/Services: If the merchant loses the friendly fraud dispute, the customer has the right to keep the shipped merchandise without paying for it.
- Loss of Overhead Costs: Not only do the customers keep the product, but they are also not liable for any overhead shipping/handling/assembly costs if they win the chargeback process dispute. This is an additional monetary loss for the merchant.
- Loss of Transaction Processing Costs: These costs at the merchant end cause a disruption in their COGS. They still had to pay the costs to process the transaction and whatever gateway fees they accrued.
- Extra Chargeback Fee: Certain cases require the merchant to pay an additional chargeback fee to continue the business.
- Additional Costs: The merchants facing a chargeback dispute often need to spend additional money and time to win the case.
- Complicated Process: The money reversal after a chargeback usually take longer than conventional refunds.
- Not Enough Support: Companies and banks are weary of people with a history of causing unnecessary chargebacks and friendly frauds. If they often request excessive, unnecessary chargebacks, the credit card issuer may refuse to consider their genuine chargeback requests after a while.
- Additional Penalties: The customers carrying out friendly fraud are often penalized with hefty fees. Banks revoke their banking privileges entirely if they continue misusing their credit card for fraudulent behavior.
- Ruined Credit Score: Loss of banking privileges in dire scenarios results in a lower credit score. A low credit score reduces the ability of the individual to get loans and banking support.
How Can iCG Help?
Customizable technology plays a significant role in helping a merchant prevent friendly fraud and unnecessary chargebacks. iCheckGateway.com is known for offering completely customizable hosted payment portal solutions. Merchants can collect the following additional information for payment processing with our technology:
- Disclaimer: Collect explicit authorization from customers that they understand expected delivery dates, the total price of the product/services, and product description before placing the order.
- Return Policies: Collect authorization from customers on the fact that they have read and understand return policies for a product correctly.
- Card Details: Check for expired or invalid credit/debit card details.
- Company Information: Collect additional company information for identity verification in corporate orders.
Moreover, our customizable email invoicing and SMS invoicing solutions help merchants customize the billing descriptors and messages so that customers do not file for an accidental chargeback. We also support merchants with virtual terminal solutions that help merchants create a digital record of transactions for easy dispute handling.
Partner with us to help your merchants prevent fraudulent chargebacks and adopt leading innovative solutions to take their business to the next level.