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    Chargeback Fraud Unmasked

    what is chargeback fraud?

    Chargeback fraud, often called friendly fraud or first-party misuse, occurs when consumers fraudulently attempt to secure refunds by initiating chargebacks instead of contacting the merchant directly. Consumers committing this style of fraud dispute the transaction directly with their bank, thus initiating the chargeback process. 

    Consumers may use various false reasons for the chargeback: that the product they ordered was defective or not delivered, that they did not authorize the transaction, or that they had requested the cancellation that was not honored, to name a few. Whatever actual reason given, chargeback fraud occurs when the real reason for initiating a chargeback is something else entirely.

    Why Disputes and Chargebacks Exist

    Simply stated, the ability to dispute a transaction through a bank or issuing partner protects consumers. Disputes serve as additional protection against legitimate fraud, such as when a card or account has been compromised and used fraudulently or when a merchant has made a mistake that cannot be resolved through other channels.

    Disputes provide accountability for both merchants and cardholders. They incentivize merchants to operate their business legitimately, with strong customer service, and empower cardholders to recover funds that have been improperly spent. However, this process works under the assumption that disputes are used responsibly and only when absolutely necessary; misuse of this process is fraud.

    Reasons Consumers Commit Chargeback Fraud

    There are many reasons consumers might decide that disputing the transaction with their bank will be more successful than directly conversing with the merchant. 

    Consumer disputes often result from one of many desires, some nefarious and some legitimate, including:

    • The cardholder wants to get something for free
    • Not understanding the chargeback process and what it’s used for
    • Buyer’s remorse
    • Forgetting they purchased to begin with
    • Attempting to get a refund through the merchant after the refund window has passed

    Committing Chargeback Fraud Isn’t Simple

    Because the card networks have established guidelines for transaction disputes so that they can best combat fraud, not all chargebacks submitted will be honored. 

    Generally speaking, the card networks require three things to start the dispute process: 

    • Timely submission: Card networks typically allow cardholders to dispute transactions within a specified window, which is often about 120 days from the transaction date
    • Reason codes: When disputing a transaction, a cardholder must provide an explanation corresponding to a reason code explaining the issue 
    • Evidence: Cardholders may need to provide receipts, proof of communication with a merchant, or a police report (in cases of fraud)

    Just because a dispute has all the required elements does not mean it will be successful. The dispute resolution process gives the merchant a chance to respond appropriately, which can—and often does—shut down fraudulent disputes.

    Why Chargeback Fraud Succeeds: Reason Codes

    The difference between the real reasons a consumer is disputing a transaction and what they tell the bank is often irrelevant because the bank cannot assess the truth of the reasons they are given. Banks simply assign reason codes based on the information a consumer provides, and merchants often accept these assigned codes at face value. 

    Recognizing what is chargeback fraud and what is a legitimate dispute can be a tricky balance for merchants, as they want to ensure they are not repeatedly questioning legitimate requests, which would harm the brand’s image. Merchants with high volumes of purchases, in particular, may find this process challenging as they may receive dozens, or even hundreds, of disputes a day that they would have to weed through. 

    Fighting Chargeback Fraud

    Chargeback fraud damages not just individual merchants but also the integrity of the whole e-commerce channel. Banks do not have time to investigate every cardholder dispute for validity and merchants rarely dispute chargebacks because of the headache it can become.

    Most merchants simply factor in chargebacks as part of the cost of doing business and do their best to keep them below an acceptable threshold. Unfortunately, banks may view this practice as an admission of guilt or wrongdoing toward the customer. Banks have very little incentive to look into potential fraud if merchants continue to operate business as usual without bringing this to the bank’s attention.

    Merchants should lean into fraud prevention tools that can score and screen purchases, as well as dispute automation programs to keep fraud to a minimum. Likewise, leaning into address verification services (AVS) and 3D Secure will add security and verification to transactions that can reduce fraud.

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