By definition, a chargeback is, “a credit card transaction reversal meant to serve as a form of consumer or business protection from fraudulent or disputed activity committed by both merchants and individuals.” Essentially, it is a customer’s claim that the product or service purchased on their credit card was not purchased by them, was purchased without their knowledge, was never received, or was not satisfactory. Often this is due to identity theft or a stolen credit card, but not always. In fact, studies have shown that 71% of chargeback disputes are categorized as fraud, and of those, 77% are considered “friendly fraud”.
What is Friendly Fraud?
Friendly fraud is the term used for a specific type of credit card fraud in which the perpetrator is actually the cardholder, not an identity thief. It’s also known as chargeback fraud. An authorized cardholder who commits friendly or chargeback fraud abuses loopholes in the system by disputing legitimate charges made to their account, which pushes their bank to force a refund under the pretense that the merchant made a mistake.
For example, let’s say your merchant runs a pet supply store. To appeal to their busy, pet-loving customers, they sell merchandise both online and in-store. A customer orders a new leash for their dog from the online store using a credit card. Once the order is delivered, the customer requests a chargeback from their bank. The customer can claim a variety of reasons for requesting the chargeback, such as:
- They did not receive the leash.
- A family member ordered the leash without them knowing.
- They do not recall making the purchase.
- They were not informed of the company’s terms and conditions prior to placing the order.
Now, if the merchant kept detailed records of the transaction, they may be able to dispute the chargeback successfully. They could use the shipping receipt signed by the customer as proof of delivery if a signature was required. They could also demand that the leash be returned, but dealing with a dishonest customer will be no easy task. If things escalate, the customer could be tempted to post negative reviews about the store and potentially cause irreparable harm to the business.
In many cases, the product loss caused by a friendly fraudster is much less expensive than the cost of a court proceeding. That means many businesses treat friendly fraud as a necessary evil, and some even account for it in their operating costs. Regardless of how they are accounted for, chargebacks are an unpredictable threat to all businesses. To stay ahead of them, your merchant should:
- Open every letter they receive from EMS.
- Monitor their payment portal daily.
- Gather any and all documentation related to a questionable transaction.
- Contact the customer if appropriate.
- Respond to chargeback notifications immediately.
- Decide if they want to fight the chargeback.
How Chargeback Fraud Can Affect EMS
Chargeback fraud doesn’t just affect the merchant. It also affects us as their payment processing company. To better understand how EMS fits in, let’s look at the steps of a chargeback:
STEP ONE: The Cardholder calls the toll-free number on the back of their credit card to dispute the charge. If the dispute is accepted, the cardholder is given a provisional credit by the Bank.
STEP TWO: The Bank that issued the credit card withdraws the funds from the Merchant’s Processor.
STEP THREE: The Merchant’s Processor withdraws the funds from the Merchant.
STEP FOUR: The Merchant gathers all pertinent documentation and then submits a chargeback dispute.
STEP FIVE: The Merchant’s Processor presents the merchant’s dispute to the Cardholder’s Bank.
STEP SIX: The merchant’s dispute is then either accepted or rejected. If accepted, the funds are deposited back into the Merchant’s bank account. If the dispute is rejected, the Cardholder’s provisional credit becomes a permanent credit.
As you can see, the merchant’s processor is an important piece of both the chargeback and chargeback dispute processes. The processor informs the merchant that a chargeback has been filed against them, and in the event of a dispute would then represent the merchant to the cardholder’s bank. The processor is essentially the merchant’s voice in these proceedings and they will rely on their processor to support them through the dispute.
Of course, EMS always supports our merchants however we can and a chargeback dispute is no exception. Chargeback fraud is relatively common and is probably not going away. However, there are some measures you should encourage merchants to take to protect themselves.
How to Prevent Chargeback Fraud
It will be difficult to halt chargeback fraud completely, but there are preventative measures merchants can take to help keep their money where it belongs. Let’s look at the red flags, along with some preventative steps for both in-store and online purchases.
Point of Sale Red Flags
First, let’s review some of the top credit card red flags to watch for at the point of purchase. If a cashier experiences one or more of these things, it is possible the customer is attempting to make a fraudulent purchase.
- Customer makes a large purchase without paying a normal amount of attention to the item details or price.
- The customer tries to rush or distract the cashier.
- Customer pulls their credit card from their pocket rather than a wallet or purse.
- Customer asks the cashier to manually key in the card rather than process the chip.
- Chip will not read.
- Customer is unusually slow or deliberate with their signature.
Next, we will examine some of the ways to prevent and prepare for chargeback fraud in-store.
Today’s upgraded payment technology offers the tools merchants need to protect their business from fraud. When processing a credit card in-store, merchants should always read the chip rather than swipe the card. If a merchant’s terminal is not equipped with an EMV chip card reader, always remind them that they need to upgrade. Fraud liability today is shifted to the party (bank or merchant) with the lower level of security. Therefore, if a merchant does not have an EMV chip-enabled card reader, they are at higher risk for being held responsible for fraud committed through their store.
Some friendly fraudsters know the chargeback system and preventative measures merchants take to protect their business. These people purposefully damage the magnetic strip or chip on their credit card, in the hopes of forcing the cashier to type in the number or swipe the card instead. Remind your merchants that if their cashier is presented with a chip card that will not read; ask for another method of payment. Even if it is a legitimate customer whose card just had an unfortunate encounter with the washing machine, it is always better to be safe than sorry.
Merchants should also make sure to have security cameras installed in their store. Cameras are a good idea for general safety, and although video footage cannot be included in a chargeback representment, a still image from the video can provide additional proof that the cardholder made the purchase. Encourage merchants to try to gather as much information from the customer as possible on each and every sale. Merchants should verify customer signatures by comparing the driver’s license and back of the card, and manually record customers’ license numbers or other ID on the store copy of the receipt.
It can be difficult to gather information from customers purchasing online, especially if they are making the purchase with the intention of charging it back. Since a signature is not being captured, a chargeback dispute will be more difficult, and merchants should take every precaution they can to prevent fraud. Embolden your merchants to try these preventative measures:
- Follow the protocols for card-not-present transactions supplied by EMS. These may require capturing information such as the customer’s IP address, using AVS and CVV verification, or requiring a customer signature as proof of delivery.
- Use a recognizable DBA on the merchant account so customers can easily identify the business on their credit card statement. A common form of unintentional friendly fraud is when a customer does not recognize a transaction on their credit card statement and reports it as a suspicious charge.
- Offer incredible customer service to prevent a complaint from turning into a chargeback. Listen to the customer’s complaint and do everything possible to provide a reasonable solution. Even supplying a refund can cost less than a chargeback.
- Identify online order red flags. Take a second look at unusually large orders or anything that isn’t considered a “normal” order for the business. If there are multiple failed order attempts from the same customer, that may be an indication that they are using a stolen card.
- Be transparent about policies. Make sure each customer will have plenty of opportunity to read the terms and conditions to prevent the likelihood that they will claim they were uninformed.
Again, remind your merchants that they can never collect too much information. It’s important to keep diligent records of transactions in case they ever have to deal with a chargeback dispute.
Chargeback Representment is the process a merchant uses to dispute a chargeback. It offers the opportunity for the merchant to plead their case, prove the chargeback was not legitimate, and retrieve the funds that rightfully belong to them. To preserve their representment rights, merchants must respond to chargebacks in a timely manner. They will only have one opportunity to represent the chargeback, so remind them to make sure they gather every piece of possible evidence to build their case. This is again why it is so important to request or record as much customer information as possible. It is always better to be over-prepared than under-prepared when it comes to protecting a business.
The current representment timeframes for major card companies are as follows:
Visa – 30 Days
MasterCard – 43 Days
AMEX – 20 Days
Discover – 20 Days
Keep in mind these are calendar days, not business days.
Before utilizing chargeback representment, merchants should consider the following:
- Why is the cardholder charging back the purchase? Understand the chargeback code (never received the product or service, doesn’t recognize the charge, not satisfied with quality, etc.) to help you try to determine if it is fraudulent, legitimate, or a simple misunderstanding.
- Is the amount of the chargeback worth the fight? If it’s only for that leash that was purchased from the pet supply store, it may not be worth the time.
- Is there sufficient evidence that the cardholder made the transaction? Check records and security cameras thoroughly.
- Has the merchant done everything possible to solve the issue with the customer directly? Sometimes a chargeback is the result of a simple misunderstanding.
If the dispute is lost but the merchant is absolutely positive they have been swindled, there are additional options. First, they can file for arbitration with the credit card company. All major credit card companies have different rules and processes for arbitration, so the merchant should research these before filing and know what they’re getting into. They also have the option to utilize the judicial system by filing a police report, pressing charges, and taking the fraudster to court. We recommend turning to these options only if the chargeback is going to cause an extreme loss, as conducting legal proceedings becomes very expensive very quickly.
Talk to your merchants today about chargeback fraud and the careful measures they can take to help prevent it! Together, we can make a difference in the small business world, one merchant at a time.