Credit Card Dispute Fraud Prevention
When the lawmakers who wrote the Fair Credit Billing Act of 1974 created the legal mandate for chargebacks, they were thinking about protecting consumers from credit card thieves and dishonest merchants. They probably weren’t anticipating the way the chargeback process itself could become an instrument of fraud.
When consumers obtain chargebacks based on false claims, they’re committing credit card dispute fraud—and merchants are the victims. Fraudulent chargebacks are extremely costly to merchants, whether they’re accepting the loss to their revenue or taking the time to fight them. What can merchants do to protect themselves from credit card dispute fraud?
Credit card dispute fraud is often called “friendly fraud,” because it can happen without any ill intent on the consumer’s part. But whether the origin is a misunderstanding or a genuine attempt at cyber shoplifting, credit card dispute fraud can be a serious problem for merchants. Up to a third of a merchant’s chargebacks may be friendly fraud, according to some estimates.
Accepting credit card dispute fraud as a cost of doing business can cost you significant revenue, and may cause your chargeback-to-transaction ratio to spike to dangerous levels. These chargebacks can be fought and won if you have evidence that proves that the basis for the dispute is false, but compiling evidence and submitting chargeback representments takes considerable time and effort—time that most merchants would rather spend focused on the core operations of their business.
Prevention is always the best approach to chargebacks. To stop credit card dispute fraud, you have to understand the many varied forms it can take.
What is Credit Card Dispute Fraud?
The chargeback process exists to protect consumers from credit card thieves and fraudulent merchants. Issuers are required to give cardholders the right to dispute a credit card charge when a third party uses the card without the cardholder’s permission, or when the merchant makes an error or refuses to honor their agreement with the customer.
In the latter case, the cardholder is ostensibly required to make a good faith effort to work things out directly with the merchant, but not every issuer is equally strict about enforcing this rule—and that’s one of the big loopholes that allows credit card dispute fraud to occur.
For cardholders, there are few downsides to asking for a chargeback, even if they have to stretch the truth to justify it to the bank. Usually, the worst case scenario is that the merchant successfully represents the charge and they don’t get their money back. Savvy merchants may blacklist the cardholder from shopping with them again, but the consequences rarely get harsher than that. While banks will sometimes close accounts that repeatedly abuse the dispute process, criminal prosecution for credit card dispute fraud is uncommon (but it does happen).
The result is that many consumers see chargebacks as one of many acceptable options when it comes to resolving an unsatisfactory purchase.
An extremely common scenario is “family fraud,” where a family member, often a child, makes a purchase on the cardholder’s card without their permission.
Banks do not consider this fraud, and it is not a legitimate basis for a chargeback. When cardholders call in to dispute these transactions, they may obfuscate their relationship to the unauthorized purchaser, or simply claim that they don’t know who made the transaction.
Because dispute fraud is hard to prove and sporadically penalized, cyber shoplifting is a growing problem for many merchants. Customers simply buy what they want, invent a reason to ask for a chargeback, and keep their ill-gotten gains.
Some shoppers will ask for a chargeback when they’re already trying to work a problem out with the merchant, just because they’ve gotten impatient waiting for a response or a refund. When the bank asks them if they made an attempt to resolve the situation with the merchant they’ll say yes, because in their mind they have—even though the merchant may be waiting for a return or in the middle of processing a refund when the customer gives up on them.
Do Cardholders Really Commit Credit Card Dispute Fraud by Mistake?
It can happen. When a cardholder is genuinely confused or forgetful about the details of a transaction, and does not have enough information to resolve the matter with the merchant, they may end up disputing the charge because they are fully convinced that it is fraud.
One of the more frequent ways this happens is when a cardholder gets their monthly account statement, sees a transaction they don’t recognize, and cannot tell from the merchant descriptor who to contact for answers. Sometimes merchants register for merchant accounts under a particular business name, then use a different doing-business-as name for their online store.
If all the cardholder sees on their bank statement are unfamiliar names that don’t easily match up to any places they remember shopping at, there’s a good chance they’ll just dispute it.
How Can Merchants Prevent Fraudulent Disputes?
Chargeback representment is one of the most effective ways to combat credit card dispute fraud.
If you keep thorough transaction and delivery records, you should be able to provide evidence that these transactions were made and authorized by the cardholder, that they received the goods they purchased, and that you dealt promptly and appropriately with any concerns the cardholder brought to you.
The more efficient way to stop it, however, is to prevent it from happening at all. Friendly fraud is difficult to prevent because you can’t screen for it; friendly fraudsters always start out as legitimate customers.
Generous and flexible return policies and an excellent customer service department can help you avoid some of the dispute fraud that get perpetrated out of impatience, but determined cyber shoplifters won’t be dissuaded so easily. The best you can do is to blacklist friendly fraudsters, meaning that you never accept any orders from them in the future. At least that way, they can’t target you a second time.
One easy fix is your merchant descriptor—check with your payment processor and make sure it includes an easily recognizable name as well as a phone number or URL where cardholders can reach you with questions.
Credit card dispute fraud is really several different problem that share a single name. It can come from otherwise good customers with bad habits that can be broken, customers who are genuinely confused and need better communication from the merchant at some point in the process, and actual malicious fraudsters.
To stop these chargebacks, you need to understand their source. A chargeback management company with the right experience and analytics can help you determine what kind of dispute fraud you’re dealing with and how you can effectively prevent it.