By understanding how chargeback fraud occurs and how costly it can be for your online business, you can take the necessary steps to prevent it.

Did you know that credit cards are the most common payment method identified on all fraud reports? And if you’re dealing with chargeback fraud, the problem is even more insidious than a stray credit card charge.

The cost of chargeback fraud is much greater than most merchants would assume. Between chargeback fees, transaction fees, and the cost of losing merchandise, chargebacks can be detrimental to any online business.

In this article, we’ll take a closer look at what chargeback fraud is, how it occurs, and you prevent it from seriously impacting your business.

What is Chargeback Fraud?

Chargeback fraud relies on our understanding of what is fraud to slip under the radar. Fraud is the intentional use of misleading or false information to illegally deprive another party of legal rights, money, or property. The challenge with chargeback fraud is that it uses a perfectly legal mechanism (a chargeback, which is a charge returned to the payment card after the customer successfully disputes it on their transaction report) to commit fraud.

In chargeback fraud, a customer disputes a transaction with their bank or credit card company rather than resolving the refund with the merchant so that they can get something for free.

The chargeback fraud definition should not be confused with a legitimate chargeback. In a legitimate chargeback, the customer goes to the merchant, figures out the problem, and returns the unwanted item or gets refunded for an item that never came. In chargeback fraud, the customer skips that step and goes straight to their bank to say the charge was made in error or the item never arrived so that they can get the purchased item for free.

It is not to be confused with a friendly fraud chargeback either, which is basically when someone unintentionally commits fraud without malicious intent. For example, let’s say a son asks to borrow his mom’s card to buy shoes. Mom agrees, but Dad doesn’t realize that, so when Dad sees the charge on the bill, he thinks it’s fraud and disputes it. This also frequently happens with forgetful shoppers and misunderstood return policies.

How Chargeback Impacts Business Owners

Chargeback fraud is one of the common types of payment fraud that business owners need to watch for. Unfortunately, it’s also tricky to spot.

Here’s the thing: chargebacks can be legitimate. However, a majority of chargeback claims are fraudulent or what’s referred to as “friendly fraud“. They’re also expensive. According to LexisNexis Risk Solutions, three related forms of fraud (true fraud/unauthorized use, friendly fraud, and chargeback fraud) account for 75% of fraud losses.

Fighting eCommerce Fraud with Solutions You Can Trust

Unfortunately, chargeback fraud is an increasingly common concern in the eCommerce world, especially during the pandemic when many shoppers are primarily using online shopping channels to purchase products. It’s easier than ever for cybercriminals and fraud rings to slip under the radar.

It may be time to consider investing in a sophisticated fraud solution that will help to completely eliminate the cost of fraud.

First appeared on Vesta’s Blog on eCommerce Fraud.