Commentary: The Top Three Ways To Protect Your Business From Chargeback Fraud

Retailers worldwide lose billions every year due to chargebacks, and a significant and growing portion of them are a result of chargeback fraud. However, it doesn’t have to be that way if businesses are proactive about implementing the right prevention strategies. 

Chargeback fraud can be defined as when an individual deliberately disputes a legitimate payment transaction resulting in a chargeback for the company where the sale was made. Instead of contacting the business where they placed the purchase, the customer goes through the issuing bank or payment processor. The customer essentially steals an item or multiple items using the chargeback process, resulting in lost revenue for the business.

However, a negative impact to the company’s bottom line isn’t the only consequence. Retailers with a high chargeback rate risk getting hit with high fees and penalties from the credit card networks. If an online merchant’s chargeback rate remains too high for too long, it risks getting relegated to one or more chargeback-monitoring programs. 

Every chargeback-monitoring program a retailer enters brings additional costs—on top of the fee for every chargeback. Most notably, continuing to have a high chargeback rate, despite monitoring, could result in the business losing its ability to accept credit cards as a payment option altogether. 

Most credit card networks today deem a chargeback rate between 0.9% and 1.5% of transactions to be an acceptable threshold. Significantly reducing chargeback fraud not only lowers your overall chargeback rate, but it captures more legitimate revenue. Here are the top three ways businesses can better protect themselves from the growing threat of chargeback fraud:

1) Use Strong Authentication Tools

You can help reduce chargebacks by using strong authentication tools, such as Multi-Factor Authentication (MFA), CVV Validation, and Address Verification Services (AVS). Here’s a closer look at each of these:

MFA: If any of your customers find that their accounts — with stored-payment methods — have been taken over and had orders placed without their consent, they’ll file chargebacks. Requiring customers to enable multi-factor authentication (MFA) for account logins can help prevent fraudsters from taking over customer accounts and placing unauthorized orders. 

You can implement MFA on your Web site using technology like 3D Secure (3DS). The key is to avoid applying 3DS to all transactions, since that adds friction. Instead, apply it when necessary to authenticate a shopper or meet a regulatory requirement. 

CVV Validation: Fraudsters often obtain stolen credit card numbers from dark Web marketplaces or phishing scams. However, they don’t always have the card verification value (CVV or CVV2) number from the back of the card. You should always require customers to enter the CVV number at checkout and use a reliable tool to validate that number. 

Address Verification Service (AVS): An address-verification check is another way to validate credit card information, helping to detect suspicious payment transactions. This looks at the billing address entered by the user and makes sure it matches the address on file with the issuer of the credit card. Before implementing this tool, be sure to confirm that AVS checks are supported by your credit card company and country. 

2) Add Real-Time Fraud Decisioning to Your Platform

With real-time decisioning, your e-commerce platform can make accurate fraud decisions before the user goes through checkout and payment authorization. If the decisioning engine has access to a global network of merchants, it can assess the identity behind each transaction. 

With insight into the user’s identity, the engine can accurately predict which transactions will likely result in chargeback fraud—and block them. Bad actors can’t initiate a chargeback if they don’t make it through the payment process.

3) Balance Fraud Prevention and Approval Rate

In response to the risk of chargeback fraud, many merchants turn to a vendor for chargeback protection—essentially purchasing insurance for fraud losses. Shifting liability for these losses has a lot of appeal, but it can introduce incentive misalignment. 

For example, the chargeback-protection vendor has an incentive to decline borderline transactions. After all, if they prove fraudulent, the vendor assumes the risk. So, oftentimes purchasing chargeback protection can impact approval rate, which conflicts with a merchant’s motivation. 

The key is to identify a solution provider that can optimize the balance between fraud prevention and transaction approval—identifying and blocking fraudsters at critical points along the digital-commerce funnel while ensuring legitimate customers can complete their purchases. Ultimately, this is how leaders across industries will reduce losses, increase revenue, and deliver positive customer experiences.

—Christine Falokun is product marketing manager at Forter.