Did you know that retailers can lose up to $4 for every $1 in chargebacks?

It's essential for online businesses, especially e-commerce brands, to have a firm grasp of how credit card chargebacks work. Chargebacks don't just cost you money; they can also impact customer loyalty and taint your company's reputation. Customers who report credit card fraud may wrongly blame the company and go out of their way to write negative reviews or avoid your company in the future. 

The good news is you can protect your business. Chargebacks exploit opportunities within e-commerce systems, but you can reduce those opportunities with preventive measures that keep you and your customers safe.

What is credit card chargeback fraud?

Designed to protect consumers from illegal credit card use, chargebacks occur when customers file a dispute with the card issuer for a charge made on their credit card. Often, the card issuer will grant immediate credit to the customer while they investigate and allow the merchant to challenge the dispute — but merchants typically only win 20-30% of those disputes and wind up having to provide the refund.

Unfortunately, while chargebacks can be nice for the consumer, it ultimately costs businesses money in the form of merchants' fees, on top of the cost of the goods they provided to their customers.

For example, if a fraudster uses a stolen credit card to purchase a TV online, the actual cardholder can request a chargeback once they realize what's happened. The retailer must refund the purchase amount, but they likely have already shipped the TV — which likely won't be returned.

So not only does the merchant lose the cost of the TV and the amount of the chargeback on the credit card, but they also lose packaging, labor, shipping, and other costs. It's in the best interest of businesses to take preventative measures through their payment processing system to reduce chargebacks and their associated fees because chargeback losses can add up quickly and significantly affect a business's bottom line.

How does chargeback fraud generally take place?

Roughly 48% of chargebacks are fraud-related. One instance of chargeback fraud is when customers dispute credit card charges and receive refunds from their banks despite the charge being legitimate.

There other instances where chargeback fraud occurs — some of which are elaborate scams involving cybercriminals while others can be everyday consumers exploiting the system. Some examples include when:

• A fraudster uses a stolen credit card to purchase something online, also known as a "card not present" (or CNP) transaction.
• The purchaser regrets making the purchase, one of many instances of "friendly fraud" or "first-party fraud" where the cardholder authorized the purchase but still disputed the transaction.
• A person who knows the credit card holder uses their card to purchase on their behalf.
• The purchaser needed help understanding the purchase process.

Common causes & preventive measures for credit card chargebacks

1. Fraudulent transactions

Causes

A fraudulent transaction occurs when a person's credit card is used illegally, usually by someone else. In these cases, the legitimate cardholder had their details stolen, either in an online data breach, via a card skimmer, or some other method. As detailed above, once the cardholder discovers the unauthorized purchase, they then file a chargeback with the credit card issuer, leaving the retailer on the hook for the chargeback, in addition to the cost of the item, time spent disputing the chargeback, and other fees.

Without measures to quickly detect and prevent fraudulent transactions, retailers leave themselves open to chargeback fraud and, potentially, compounding financial losses.

Preventive measures

The best way to prevent chargebacks from fraudulent transactions is to implement checks and fraud detection software like device intelligence to help flag potentially fraudulent patterns of usage and purchases during the checkout process. 

A couple of red flags that can signal a transaction is fraudulent include:

• The IP address of the purchaser is unusual; e.g., located in a country you've never sold to before or does not match with the credit card's issuing country or region.
• A credit card used for many smaller transactions in a short time or for an unusually large purchase.

Additionally, using device intelligence software provides device fingerprinting, which meets Visa's Compelling Evidence 3.0 and Mastercard's criteria as an accepted data element to help merchants win chargeback disputes.

2. "Not delivered" packages

Causes

A customer may seek to initiate a chargeback on a credit card if they don't receive their purchase within an expected time frame, even if the package is on its way. To avoid this, retailers should ship purchased goods as soon as possible. If shipment will be delayed because an item is backordered, is a pre-order, or because of other similar circumstances, retailers should clearly state in customer communications the reason for the delay and expected ship date.

However, shipping delays can occur due to human error or reasons out of the retailer's control, such as bad weather or worker strikes. If there's a delay in shipping, your business may not lose the item, but if you've already sent it, you're at risk of having a chargeback filed against you.

Preventive measures

• Ensure the most accurate shipping address using an auto-fill service like this one from Google.
• Clearly state the expected delivery date and track deliveries.
• Check your shipped orders regularly for issues or anomalies, such as outstanding deliveries.
• Build standard customer communication processes if a package gets delayed, lost, damaged in transit, or returned.

Even if a package isn't delivered as expected, you have a greater chance of winning a chargeback dispute if you can show the bank that you've done all you could in the dispute process.

3. Incorrect charges on the account

Causes

Chargebacks can also occur when a transaction's value differs from what the consumer expected.

For example, customers will likely remember that they bought a shirt for $50, but may not consider that shipping and credit card fees brings the actual total to $60. So when they see on their credit card statement that the purchase was $60, they file a chargeback because they believe they were charged the wrong amount and want their money back.

These merchant chargebacks illustrate the importance of communicating the final value of purchases, including any additional charges or fees.

Preventive measures

The card issuer may side with the consumer in a chargeback dispute if the retailer can't show that it did all it could to convey the total purchase amount. We recommend following these steps to avoid customer misunderstandings:

• Make additional fees or charges clear on invoices.
• Display the final total, inclusive of fees and other costs, in bold and large font.
• Offer different shipping options, with the costs very clearly outlined, so the customer can select their preference.
• Send a purchase email confirmation, the total amount charged, and a breakdown of any fees, including applicable taxes and shipping costs.

4. Unrecognized business name

Causes

A consumer may initiate a chargeback when they look through their credit card statement and see card usage at what looks like an unknown business. Still, it's possible that it was a legitimate transaction, especially when the merchant uses a third-party shipping service (3PLs), sells on a marketplace (e.g., Amazon), or uses other outsourced inventory management solutions.

Preventive measures

• Ensure your business's name appears clearly and prominently on your customers' statements.
• Use your business's trading name.
• Don't disguise your business name with sequences of random numbers and letters.
• Register your business in the same name your customers would use for you.

5. Recurring payments due to failure to cancel subscriptions

Causes

A customer can request a chargeback if a transaction is processed for a subscription they wanted to cancel but didn't. For example, customers may deliberately wait for the subscription payment before going to their bank, claiming they forgot to cancel it. The card issuer may find it in the customer's favor if you're unable to provide proof that you took steps to remind them the payment was coming up.

Preventive measures

• Send a reminder notifying the customer when a subscription renews each month.
• Send a confirmation email or a receipt once a subscription renews, confirming the purchase. 
• In your terms and conditions, mention that you will not be liable for unintended subscription payments. 
• Offer an easy and automated process to either put a subscription on hold for a set time or cancel altogether to avoid refund requests or chargebacks.

Key takeaways

Credit card chargebacks are a great form of customer protection for individuals but can pose expensive business risks. That's why following best practices for receiving online payments and communicating with customers is essential to minimize chargeback risk.

Even if you can't prevent customers from attempting chargeback fraud, implementing chargeback prevention measures gives you a greater chance to defend disputes successfully. One of those preventive measures can be implementing software for accurate device identification, such as Fingerprint. 

Learn even more chargeback prevention tips here.