The Best Tips for Credit Card Dispute Fraud Prevention
Table of Contents
- What is a credit card dispute?
- What is credit card dispute fraud?
- Why does credit card dispute fraud happen?
- Do cardholders really commit credit card dispute fraud by mistake?
- How can merchants prevent fraudulent disputes?
- The consequences of credit card dispute fraud
- How long does a credit card dispute take?
- Can merchants actually win credit card disputes?
- Do credit card networks like Visa investigate credit card disputes?
When the lawmakers who wrote the Fair Credit Billing Act of 1974 created the legal mandate for chargebacks, they were thinking about protecting people from credit card thieves and dishonest merchants. They probably weren’t anticipating the way the chargeback process itself could become an instrument of fraud.
While credit card disputes exist to help victims of fraud, sometimes customers commit fraud themselves by using the system to take advantage of merchants. This is often referred to as credit card dispute fraud, chargeback fraud, or friendly fraud.
How does this form of fraud work, and what can merchants do to protect themselves from it?
What is a credit card dispute?
A credit card dispute is when a cardholder asks their bank to reverse a transaction. They may do this because they feel they didn't get what they paid for, they don't recognize the transaction and believe it to be fraudulent, or because they're looking to take advantage of the system to try to get something for nothing.
When a cardholder disputes a transaction, their issuing bank will ask questions about the details of the transaction and the reason for the dispute. If the dispute seems legitimate, the bank will initiate a chargeback. Note that if the legitimacy of a dispute falls into more of a gray area, the bank will usually err on the side of the cardholder.
When a chargeback is initiated, the cardholder is issued a temporary credit for the amount of the transaction. The merchant's account is debited the same amount plus a chargeback fee. If the merchant believes the chargeback to be illegitimate, they bear the burden of proof. Through a process called representment, the merchant must present evidence proving that the transaction was legitimate and the chargeback isn't.
The entire process can take months to resolve, and even if the merchant fights the chargeback and wins, they're still responsible for the chargeback fee, and the transaction will still count against their chargeback ratio.
If a customer is actually the victim of credit card fraud, then the merchant must simply accept the chargeback. If the claim is an instance of credit card dispute fraud, however, it can cost the merchant significant revenue and hurt their standing with credit card networks.
What is credit card dispute fraud?
Credit card dispute fraud is any situation in which a cardholder disputes a charge under false pretenses, knowingly or not. It's often called friendly fraud because it can happen without any ill intent on the cardholder’s part.
Sometimes the merchant descriptor that appears in their account statement might not match the name by which they know the business, and so they don't connect the transaction with the purchase they made. Other times a customer might forget about a purchase they made altogether, or incorrectly think a purchase made by another authorized user, such as a spouse, is fraudulent.
Of course, there are some cases where the cardholder knows they made the purchase, and just thinks they can get away with disputing it to get their money back. That way they get to keep the item they purchased without having to pay for it.
Whether its origins lie in a misunderstanding or an 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.
Why does credit card dispute fraud happen?
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 (though it does happen).
The result is that many customers 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 doesn't 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 can't 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 most efficient way to stop fraudulent disputes, however, is to prevent them 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's 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.
The consequences of credit card dispute fraud
Credit card dispute fraud is really several different problems 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.
Treating credit card dispute fraud as simply a cost of doing business can cost you significant revenue and may cause your chargeback-to-transaction ratio to spike to dangerous levels.
If your chargeback ratio is too high, you may face consequences including fines, restrictions, and even termination of your merchant account.
These chargebacks can be fought and won if you have evidence that proves that the basis for the dispute is false, but that won't change their effect on your chargeback ratio. In addition, compiling evidence and submitting chargeback representment takes considerable time and effort — time that most merchants would rather spend focused on the core operations of their business.
To prevent 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, and can handle the representment process on your behalf.