Online Gaming Chargebacks

Table of Contents

1. Why Are There So Many Chargebacks in Video Games?
2. What Is Friendly Fraud?
3. Why Are Video Games a Target for Card Testing?
4. Why Are Video Games Especially Vulnerable to Account Takeover?
5. Chargebacks From Purchases Made by Children
6. How Can Merchants Fight Video Game Chargebacks?
7. How Can Merchants Prevent Video Game Chargebacks?
8. Balancing the Risks of Chargebacks
9. What Happens if You Lose a Chargeback?
10. What Happens When a Merchant Doesn’t Respond to a Chargeback?

The way customers pay for video games has changed a lot over the years. There were arcade machines, where customers paid a quarter at a time. Then came home video game systems, with the games themselves held on a physical cartridge or disk that customers bought and took home with them. Now, digital purchases are the norm, and with them has come a whole new business model.

Nearly every major game release these days includes micro-transactions: small purchases of in-game items like characters, outfits, or progression boosts. While these additional purchases have been an enormous financial boon to the video game industry, they've also led to a major increase in chargebacks. Let's take a look at the major causes of chargebacks in video games and what merchants can do to fight and prevent them.

The most popular platform for gaming these days is mobile phones. According to market research firm Newzoo, roughly 2.7 billion people around the world played video games in 2020, with half of all spending coming from the U.S. and China. Most of that can be attributed to the ubiquity of smartphones. The revenue generated by video games worldwide is expected to reach $178 billion this year.

Whether it’s subscriptions, loot boxes, downloadable content, expansion packs, or unique characters, video games are moving a lot of digital product nowadays.

With so many ways to spend money on video games, it’s no surprise the industry generates a lot of chargebacks. And given the size of the market, significant sums of money are being forfeited when chargebacks against video game purchases go unchecked.

Because video game companies want players to be able to quickly make a purchase and jump right back into the game, they take care to ensure that the transaction process is as quick and easy as possible.

While that's a benefit to legitimate customers, it also makes it easier for card testers to churn through hundreds of stolen credit card numbers to find the working ones.

These purchases also frequently use stored payment credentials and don't require a lot of additional customer information. That means it's easier for children to make purchases without permission and easier for customers to falsely claim that a purchase was fraudulent.

Let's take a look at some of these factors in greater detail.

One common scenario is that a player will spend a lot of money in the heat of the moment, whether to make it easier beat a difficult level or to get a rare prize from a random assortment, and then regret it later when the thrill has worn off.

Once a friendly fraudster gets away with having their in-game charges reversed, they’re likely to keep attempting it over and over again until the merchant catches on. Some players will brag in an in-game chat or online about how they’ve made thousands of dollars in purchases and never paid a cent, which often influences other players to follow their bad example. Even in non-gaming contexts, friendly fraud seems to be a habit-forming behavior, with most perpetrators making at least three attempts per merchant unless stopped.

The best and most effective way to deal with these players is to blacklist them—terminate their accounts, maintain a database of their identifying information, and block them from registering again.

Some of these chargebacks can be dealt with preemptively by providing excellent and easily reachable customer service, and by clearly explaining beforehand what is included in purchasable content, or what the actual odds are of obtaining valuable prizes from a random pull. It's usually better to give a customer a refund if the alternative is a chargeback, since refunds don't come with extra fees or add to a merchant's chargeback ratio.

When a fraudster obtains a stolen credit card number, they never know if it’s going to work or not. It might be maxed out, or already reported, and if they intend to make a big purchase with a stolen card, they want to be sure it will be approved—declined charges may cause the merchant to look more closely at the transaction and realize that fraud is involved.

That’s why many fraudsters engage in “card testing,” where they make small purchases on the cards to check which ones are valid. Once the fraudster shifts to using those cards to make big purchases and the cardholders or banks take notice, however, all those small transactions can turn into chargebacks.

Fraud prevention tools are really the only effective defense game companies have against card testing. Good tools will include velocity checking, which looks at how many transactions are coming from a particular IP address and how many cards are associated with each user account. This can give you the information you need to identify and block card testers.

Once inside the account, the hacker may be able to make in-game purchases or use up resources that the account owner already purchased. In either case, once the owner realizes that their account has been compromised, they will often dispute any charges that may have been made or exploited by the hacker.

In many cases, account takeover in video games is used to support cheating. A player can buy software online that lets them cheat in a game, but often their account will eventually get suspended.

Rather than buying another copy of the game under a new account, they can instead purchase stolen login credentials for someone else's account. These compromised accounts will often have stored payment information.

Requiring two-factor authentication will stop most account takeover attempts cold, but this can also alienate players who don’t want to bother with complicated login procedures every time they want to play a game for five minutes. Merchants must balance always balance security against convenience, and weigh options like two-factor authentication and stricter password requirements carefully.

It also helps to have a proactive and involved customer service team that will work with compromised account holders to restore any in-game resources that might have been lost or expended.

Chargebacks From Purchases Made by Children

Unauthorized purchases made by children using their parents' credit cards are a frequent problem in the video game industry. Many games automatically save credit card information for future purchases and don't require additional authentication when a purchase is made.

This means that if a parent enters their card information to purchase an in-game item for their child, that child can go on to make any number of additional purchases on their own, in some cases without even realizing that there's any money involved.

Some credit card issuers have policies which state that a charge only counts as not-authorized if it's the result of the card or account information being lost or stolen. Purchases made by children without permission would thereby be ineligible for a chargeback. However, other issuers may allow these chargebacks, and many have no clear policies at all.

When merchants receive a chargeback for this reason, it can be difficult to know whether winning the charge through representment is likely, especially since you'd have to know the policies of the specific issuer in question.

Chargeback management companies will often have the information and expertise to help make the right decisions in these cases. For merchants, however, the best option is to prevent these chargebacks from happening in the first place.

While it can be difficult to balance the goals of preventing chargebacks and making transactions as fast and easy as possible, video games are one area where the risk of chargebacks is often high enough to tilt the scales in favor of prevention in most cases.

At the bare minimum, storing payment credentials should be made optional, ideally under an opt-in system rather than an opt-out one. That way customers who want to avoid the hassle of re-entering payment details can do so, and parents won't have to worry about their children making unauthorized purchases.

Note that you can only fight a chargeback if it's illegitimate. Chargebacks that are the result of true fraud must be accepted. However, many chargebacks in video games involve false claims of fraud, so merchants must take care to distinguish between the two.

The truth is that major game companies that use micro-transactions in their games are losing a significant amount of money on chargebacks, often due to friendly fraud. This, in turn, is leading to problems with things like customer retention and attracting new customers.

Good customer service is good chargeback prevention, so merchants who make it a priority will already have a great head start toward preventing chargebacks in the future. Situations like purchases made by children are a great opportunity to prevent a chargeback by giving the customer a refund instead.

Setting clear expectations around purchases can help avoid the buyer's remorse that often leads to chargebacks. To that end, give customers as much information as possible about potential purchases.

Of course, for chargebacks caused by fraud, the only solution is effective fraud prevention. Use a combination of different fraud prevention methods to help stop unauthorized transactions and make sure your fraud tools are tuned to suit your particular business.

Balancing the Risks of Chargebacks

Online gaming will always be a tempting target for fraudsters. The market pressures that lead game designers to remove any barriers to logging in and making purchases nearly always have the unintended effect of facilitating fraud and making it harder to stop bad actors from taking advantage of you.

Take things too far in the other direction, however, and you’ll see fewer players and purchases across the board. It’s a difficult balance to strike, but game publishers have to do their best to achieve it.

No matter what industry you’re in, you can prevent many chargebacks simply by providing the best customer service you can. When customers know they can reach out to a company to have their problems and needs addressed, dealing with their bank to dispute a charge becomes a much less attractive option.

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