Don’t Accept Chargebacks as a Cost of Doing Business

Chargebacks 101

Don’t Accept Chargebacks as a Cost of Doing Business

Selling online is a fast-growing, and booming industry. With an increase of approximately $500 billion by the end of 2019 in online sales will come the complexities of processing all these transactions. 

An often-overlooked aspect of ecommerce today is the multifaceted and ever-changing ways in which fraud can put a company at risk, as well as the rising costs it takes to mitigate these micro-crises in order to prevent them from growing to the macro level, as well as the added concern of chargebacks.

Chargebacks cycle

Source: Chargebacks911

A chargeback occurs when a fraudulent purchase has been made and the customer who didn’t actually make the purchase requests a refund. This is bad for business because the company is both financially responsible for giving the customer back their lost cash as well as biting the cost of the good or service wasted or sent to the cyber-criminal, the shipping costs, and the other related operational costs.

Additionally, chargebacks can occur when a customer did not receive the thing they purchased, they did receive the thing but it was damaged or not as described, or they simply regret making the purchase.

Needless to say, fraud and chargebacks can cost companies a lot of revenue; $80 billion annually (source PRWeb). Training and hiring staff who understand fraud prevention and chargebacks alone accounts for almost half of related operational expenses and management of the aforementioned can take up to a fifth of the operational budget.

Share of chargebacks disputed

Source: Chargebacks911 – White paper, The State of Chargebacks 2018

What are the different types of fraud?

Knowing the most common types of frauds and chargebacks upfront can help a company in the long run because they know what to look for and how to accommodate their customers, as well as ensuring their employees are well-versed in dealing with them.

Credit card and card testing fraud

This kind of fraud happens when a person attempts to use a stolen credit card to commit theft (also known as identity theft). If the business approves the transaction, they’re responsible for ensuring the customer is who they say they are and will be financially responsible for refunding the transaction when the customer reconciles their financials. 

Additionally, credit card numbers can be tested until a certain combination works, but the above still applies. This can easily result in more chargebacks as customers rightfully deny that they were the ones who made the initial purchase.

Friendly fraud

This occurs when a person buys something online, receives the good or service, and then erroneously claims that their credit card was stolen when it was not in fact used fraudulently. 60–80% of chargebacks are caused by friendly-fraud.

Phishing

One of the more common types of fraud is phishing. This occurs when a website or email acts as some kind of credit or otherwise legitimate institution and acts as though they need information for verification—usually, this information is credit card info and personal details that can then be used to make a purchase.

Five ways to prevent fraud and reduce chargebacks

#1. Require AVS (Address Verification) and CVV when accepting payments. 

It’s a pretty standard practice but you’d be surprised at how many people don’t have it implemented. Both are additional security measures specifically targeted at reducing fraud.

#2. Keep an eye out for suspicious activity

Obviously, if you have recurring issues with a particular party or entity, that should raise some red flags. Keep an ongoing list of confirmed fraud attempts and make sure your records are meticulous to make sure it doesn’t happen again.

Fake phone numbers, expedited shipping when billing and shipping addresses differ or when large quantities of an order has been placed, or when somebody purchases an unusually large or high-priced order are some more suspicious activity to watch.

#3. Ensure the IP location matches the billing address

This might be something to discuss with your e-commerce platform provider, but you need to make sure that, for instance, an overseas IP isn’t shipping to somewhere in Montana. If your e-commerce platform doesn’t offer this kind of protection, it might be time to find a new one.

#4. Know your targeted audience, demographic and customer base

Generally speaking, your customers should follow a relatively set standard in regards to demographics and patterns. 

Orders from customers that don’t normally fit this might be a cause for alarm, at the same time you don’t need to do a severe search into every new customer that falls outside your intended audience because that would eat up operational costs and could potentially deter new customers from sticking with your brand. Overall, knowing your customers certainly can’t hurt.

#5. Limit the number of declined transactions

Typically, fraudulent purchases are made through multiple attempts at guessing certain combinations of information.

If you plan on starting an online business or increasing your sales as an existing online seller you have to understand and take control of any chargebacks. If you find yourself in the unlikely position where you’re seeing too many chargebacks, it can start to eat away at your profit margins.

When a customer files their dispute, it’s much easier to simply reverse the transaction and refund your customer. As your business scales, and depending on the average order value of your goods—designating a professional chargeback management firm is a smart decision.

Chart fraud prevention teams

Source: Chargebacks911 White paper – The State of Chargebacks 2018

When you work with a professional firm, such as LimeLight offers via Chargebacks911, you’re better able to combat dishonest customers who use abuse the chargeback processed offered by financial institutions and card issuers to protect customers. 

Sometimes chargebacks are caused by honest errors, as described. Regardless of the cause of chargebacks, businesses should take measures to reduce them.

Our team at LimeLight is here to help you, we have state of the art systems in place to implement the above-mentioned techniques automatically.

To get started or if you have questions about how you can easily fight chargebacks, speak to your designated Client Success Manager or contact our support team.