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A Simple Guide for Reducing Fraud by Managing Chargebacks

When starting a business your responsibilities never really stop.

One of the many aspects of running your own company is keeping your customers happy after they spend money on your product. Even then there is still time for them to regret their purchase.

The thing is, any kind of chargeback can cost you time, money, rating, or even reputation. And, it makes a convenient opportunity for anyone with fraudulent intentions.

At the end of the day, any kind of income loss is not good for business. So, in order to reduce the risk of fraud, it is essential to get familiar with handling chargebacks and the best methods of their prevention.

What are chargebacks

The easiest way is to define a chargeback as an online transaction that is disputed by the buyer.

In that regard, it is similar to the refund, with one crucial difference.

With the chargeback, the customer doesn’t contact the seller, but the issuing bank, taking the potential problem to another level.

The bank, not the seller, decides on the issue after the investigation period. If the decision is in the favor of the buyer, the seller loses revenue.

Different reasons for chargebacks

Not every chargeback is requested in the same manner or for the same reason. Here are the three main examples of customers initiating the chargeback process:

Seller’s error – a problem that occurs on your end. It can be some sort of technical mistake, shipping issues, delivery problems, etc. These are legitimate cases that can affect your revenue.

Clear fraud – purchases that have been made with a stolen credit card or bank account information. In some cases, they can operate for an extensive period of time until their fraudulent activity is detected.

Friendly fraud – also known as a liar buyer or as chargeback abuse. This is a fast-growing problem in the industry and requires additional attention.

So, researching it even further the friendly fraud can be divided into three different types:

  1. Accidental friendly fraud – in certain situations a buyer made an accidental purchase. Don’t forget, simple and innocent mistakes can happen to anyone. Another example of this type of fraud (also known as family fraud) is an unauthorized purchase made by a child, without their parent’s knowledge.
  2. Opportunistic friendly fraud – in some cases a buyer simply regretted the purchase, in others, the buyer can be disputing an existing chargeback policy in some way.
  3. Malicious friendly fraud – a very frequent example is buyers trying to get merchandise without paying for it by exploiting and manipulating the chargeback process. In other words, this is, plain and simple, an intentional fraud.

It is important to understand chargeback frauds as much as possible in order to know how to handle it in the most effective way since they can require different approaches.

How much does it cost

For starters, the chargeback costs more than a regular refund simply because in that situation the seller pays a certain fee (the amount itself varies).

Chargeback fraud can then collect additional expenses such as standard transaction fees, operational costs, marketing expenses, high chargeback ratios, etc.

Altogether, global statistics show a definite increase in payment frauds of various sorts.

How to calculate the ratio?

You can calculate the chargeback rate by dividing total monthly chargebacks by total monthly transactions.

How to deal with fraudulent chargebacks

Some methods are quite effective in reducing the chances of chargebacks by optimizing the whole purchasing process

Consistency and proper advertisement

It is quite simple, advertise your products exactly as they are. The more honest you are when describing your products, the less likely you will have to deal with unsatisfied customers.

And keep in mind, consistency is key. Once you’ve established an advertisement policy maintain it throughout your marketing plan.

Customer service

Get to know your customers. The more you know about them and their purchasing habits the more efficient you are with reducing the risk of any potential chargeback fraud.

This also means establishing customer service to provide quick solutions or explanations for any uncertainty.

Luckily, there are numerous customer service tools to help you stay on top of things, no matter how hectic business gets.

Minimizing shipping errors

Errors in shipping and packaging are rather common problems and usual reasons for chargeback requests.

It is up to you (and your company) to make sure that the products are safely packaged and shipped on time (punctuality is crucial) and to the right address.

There are, of course, occasions where the delivery delays (being a matter of a larger scale) are not your fault.

Chargeback solutions

There are some additional and valuable systems in dealing with chargebacks:

  • 3D-Secure – an added layer of protection that allows a seller to verify and share data with the bank
  • Credit Card Verification code (CCV) – a code of three or four number that validates the transaction between the seller and the credit card company
  • Address Verification Service (AVS) – service that compares the billing address of the buyer with the one that is registered with the bank
  • Payment Services Directive 2 (PSD2) – is a set of laws for payment services created to protect the users from fraud
  • Chargeback notifications and analysis – it is important to have real-time notifications that help you deal with the potential problem as soon as possible. No matter the results, continue to analyze metrics since there is always room for improvement
  • Delivery confirmation – provides more detailed information about the delivery status such as the exact time that the order has been made and the product shipped, how it is being delivered, etc. Tracking the delivery process can be reassuring for the customer.

Conclusion

All and all, running a business is a full-time commitment and it doesn’t come without its risks.

However, with the proper measures and actions, you can improve the buyer’s experience by making sure that the transactions go smoothly and efficiently.

Not only will you drastically reduce the risks of chargeback frauds, but also establish an ever-growing base of satisfied customers.

About Shane Avron

Shane Avron is a freelance writer, specializing in business, general management, enterprise software, and digital technologies. In addition to Flevy, Shane's articles have appeared in Huffington Post, Forbes Magazine, among other business journals.


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