10 Tips to Avoid Fraudulent Chargebacks from Online Sales


10 Tips to Avoid Chargeback Fraud on Online Sales for Small Business

Businesses that operate online are increasingly being targeted by fraudsters. In 2014, it was estimated US businesses suffered from $8 billion worth of losses to online swindlers. Chargeback fraud is a growing concern for businesses, increasing by 41 percent year-on-year.

The term chargebacks refer to the return of funds to a customer, which has been initiated by the issuing bank under the instruction of the customer. This differs to fraudulent chargebacks, also known as friendly fraud, which involves a customer paying for goods or services via their credit card and then requesting a chargeback from the issuing bank, despite having received the goods or services.

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How to Avoid Chargeback Fraud

Small Business Trends spoke to Matthew Katz, CEO and founder of Verifi, a leading provider of payment and risk management solutions for online retailers, for advice on how small businesses can avoid fraudulent chargebacks on online sales.



Implement an End-To-End Fraud and Chargeback Management System

Matthew Katz warns that Card Not Present (CNP) merchants are especially vulnerable to chargeback fraud, since the authentication process is less tangible than for a brick-and-mortar store.

Consequently, CNP merchants should implement an end-to-end fraud and chargeback management system that ensures payments are protected and that the merchant is included early in the dispute process.

Deploy A Layered Fraud Prevention Suite

Katz also advises businesses to deploy a layered fraud prevention suite that is customized for their specific business.

“The right fraud prevention suite can detect anomalies early in the sales process, oftentimes placing a suspicious transaction on hold before the merchandise is shipped to a fraudster,” says Katz.

Look Out for Unusually Large Orders

Matthew Katz says Verifi always counsels its merchants and issuing banks to look out for unusually large orders. Whether by number of items or dollar amount of the item(s) being purchased, unusually large orders can be a signal of fraudulent activity.

Watch for Several Orders Placed with Different Card Numbers but from the Same IP Address

According to Verifi’s CEO, another signal of fraud is several failed transactions, as fraudsters may be attempting many different card numbers until they find one that succeeds. Small businesses operating online should therefore be aware of this and look out for it.

Be Wary of a Transaction that Attempts to Overcharge the Card for More Than the Transaction Amount

Another signal of a potential chargeback fraud is a transaction that attempts to overcharge the card for more than the transaction amount. According to Katz:

“Any transaction that attempts to overcharge the card for more than the transaction amount and then pay out a third party by a different payment type (cash, money order, check, etc.) is likely to be fraud.”

Don’t Wait for Your Bank to Notify You of a Chargeback

According to Katz, merchants who wait until their merchant bank notifies them of a chargeback, are already operating at a disadvantage.

Use a Fraud and Chargeback Mitigation System That Inserts the Merchant Early

A merchant’s actions in the case of a fraudulent chargeback, Matthew Katz notes, will depend on the strength of their fraud and chargeback mitigation system.

“A system that inserts the merchant early in the dispute process will mitigate a majority of chargebacks, and thereby save the sale without spending too many resources,” says the CEO.

Ensure Billing Descriptors Are Accurate

One of the pet issues at Verifi is the matter of easy-to-recognize billing descriptors. A billing descriptor is often only the merchant’s name and appears alongside the amount of the corresponding transaction.

Katz says Verifi is surprised by the number of merchants using vague or inaccurate descriptors. As these inaccuracies can lead to cardholders disputing the charge in the belief that the transaction was fraudulent, online businesses should take the time to ensure billing descriptors are accurate.

Look Out for Transactions Attempted from an IP Address in a High-Risk Country

Matthew Katz also warns businesses to keep a close eye on transactions attempted from high-risk countries, such as Russia, Malaysia and Ghana. Merchants should also look for an IP address whose location does not match either the billing or shipping address.

“A cloaked IP address is also an indicator of fraud,” says Katz.

Keep an Eye on Suspicious or Fake Information

By the same token, Matthew Katz urges businesses that sell online to look out for the use of suspicious or fake information used to place an order, such as obviously fake phone numbers or email addresses.

With 85 percent of all chargebacks likely to be fraudulent, chargeback fraud poses a real problem for small business. It is therefore imperative small ecommerce traders are aware of what to look out for and take the necessary steps to protect themselves from this rising segment of online fraud.

Online Shopper Photo via Shutterstock

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Gabrielle Pickard-Whitehead


Gabrielle Pickard-Whitehead Gabrielle Pickard-Whitehead is a professional freelance writer and journalist based in the United Kingdom. Since 2006, Gabrielle has been writing articles, blogs and news pieces for a diverse range of publications and sites. You can read Gabrielle’s blog here.

One Reaction

  1. Our customer service team have this policy of checking overly large orders and repeated orders to see if the buyer will eventually do a chargeback.

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