How to prevent chargeback fraud in 2020/21

Learn about pre-fraud solutions for businesses.

Do you have a chargeback problem? Find out the difference between intentional and avoidable chargeback fraud and what you can do to prevent chargebacks cost-effectively at the important pre-fraud stage.

IN this article:

Learn about two types of chargeback fraud - Intentional and Avoidable and discover:

In 2020 online sales have increased exponentially. Shopping services have seen a rush of businesses trading online for the first time, and an increase in revenues for businesses already selling online. For example, Shopify, the Canadian ecommerce company has reported growth in revenue of 97% compared to the same period in 2019*. That’s way above pre-Covid forecasts and puts it ahead of Ebay in terms of revenue.

Where there are sales, there is fraud. Where there is online fraud, there’s chargebacks.

Email Hippo fraud prevention woman identifying fraud

What is chargeback fraud?

Chargeback fraud is often referred to as ‘friendly fraud’. It takes place when a business is required to make a payment to the bank after a transaction has taken place. The payment (and fees) can be requested many months after the original transaction has taken place.

Do you have a chargeback problem?

If you’re experiencing chargeback problems you’ll know that your business is asked to refund a payment because the bank has either issued or is in the process of issuing a refund to the consumer. The threshold of proof for consumers to make a successful chargeback is fairly low. It’s not too hard to make a chargeback claim. Banks tend to fall on the side of customers. This is partly because refunding chargebacks is something measurable that banks can do to show that they are taking action to deal with reported fraud. For more details about why chargebacks can be reported as fraud - see below.

By turning to the merchants for payment and fees banks aren’t left out of pocket. So at a basic level, it’s quick, easy and cost effective for them to pass chargebacks on to the merchants. 

It’s up to you to take steps to prevent chargeback claims against your business being successful. The most successful way to fight chargebacks is to stop them from happening in the first place.

Business problems caused by chargeback fraud;

  • Revenue loss - recent reports on international fraud suggested businesses will need to allow between 3%  - 10% of revenue to deal with fraud in 2021.
  • Measurement discrepancies - It’s not always easy to account for chargeback fraud, especially for silo businesses that don’t have full site of a transaction from nose to tail. That means the direct and indirect cost impacts of the fraud can be underplayed.
  • Time lag - Visa used to allow shoppers almost a year to make a chargeback claim. It’s still 120 days. Businesses can be side-swiped by the impact of refunds that take place long after their own refund policy timeframe has passed. To put a timeline against it, sales made in the pre-Christmas period might be chargeback fraud in late spring.
  • Business interruption - Merchants with a high proportion of chargebacks will have to prove to payment gateways that they have plans in place to reduce future chargebacks and could even be blocked from transacting online.
  • Resource cost - it’s time-consuming to fight a chargeback claim. That’s why many businesses simply accept chargeback claims that are for small amounts. Which is why some fraudsters commit serial chargeback fraud.

Types of chargeback fraud

Chargeback fraud is either intentional or avoidable. 

Avoidable chargeback fraud takes place because the buyer experiences a change of circumstance, thinks they have been the victim of fraud, or that the business they bought from has broken the terms of the sale. 

Intentional chargeback fraud is pre-meditated. Simple as that. A person will buy goods or services with the intention of claiming they weren't received or delivered as described.

Prevention is better than cure

Six ways to prevent avoidable chargeback fraud

Email Hippo chargeback fraud being reported

  • Have clear policies, especially concerning refunds and returns. Make relevant messages clear at different stages of the transaction.
    • Policies are a legal requirement for online and offline trading
    • Helpful to the business and customers
  • Use payment gateway anti-fraud features
    • Can prevent fraud from obvious directions e.g. blocking credit card transactions from specific areas
    • Broad-brush approach that’s not tailored to individual business circumstances
    • Many businesses just rely on default settings
    • Fraud detection often takes place after the transaction, so businesses still experience a cost for dealing with the impact of the event
  • Communicate effectively
    • Make sure the customer recognises your name when they see it on their bank statement. Companies with trading names and abbreviations on transactions are more likely to raise suspicions and cause customers to report a transaction as fraud, just because they don’t recognise it. This is especially important as more people buy more goods and services online. 
    • Following from above, confirm transactions so customers can trace you and query a purchase with you, rather than turn to a chargeback straight away.
    • Capture accurate contact details, email verification will help you do this
    • Remember, this communication is especially important as people share accounts and credit cards, so the person checking a statement won’t necessarily be the person who made the transaction.
  • Act quickly to provide refunds as delays may cause chargebacks
    • If you agree to refund a transaction, or make other promises regarding disputes, do it promptly, or a customer may believe you’ve not provided a refund and claim a chargeback.
  • Make it easy for customers to speak with staff that are trained to deal with complaints and enquiries. If it’s easy to get a resolution they might not claim a chargeback.
  • Employ fraud detection services
    • Services can provide guarantees for detecting and successfully challenging chargeback fraud
    • These are often expensive and prohibitive for high volume and/or low value transactions
    • They can be relatively complex in comparison to the scale of a fraud problem
    • Detection deals with the impact of fraud after it has taken place

Four ways to prevent intentional chargeback fraud

Email Hippo pre-fraud solution in action

Use pre-fraud solution(s) to screen new accounts and guest checkouts.

  • Use Captcha services on sign-up forms to challenge bots
    • Adds customer friction and increases basket abandonment rates
    • Can be a barrier to sales, especially on mobile devices
    • Can cause accessibility issues
    • Easy to install onto forms
    • Rules can allow for multiple challenges
    • Deters bot sign-ups
  • Integrate fraud detection software at first point of contact
    • Detects risky users without the need for manual review
    • Allows businesses to automate messages and processes
    • Provides a trail of attempted sign-ups, allowing businesses to understand their risk profile
    • Allows businesses to set and change rules 
    • More complex than Captcha to install
    • More cost effective than manual reviews
  • Carry out manual review of all transactions
    • Delays and prevents sales for real customers
    • Expensive in terms of manpower and time
    • Reduces fraud
    • Can be carried out in house or by an agency service
    • Works for many B2B situations 
    • Removes the need for online payment systems
    • Removes choice for customers about payment choices
    • Can improve customer service and enable businesses to get closer to customers
    • Gives more effective opportunities to upsell and be sure the products sold are right for the customer
    • Not feasible for high-volume, low value purchases
  • Use a double opt-in email sign-up
    • Easy to set-up
    • Doesn’t prevent fraudulent sign-ups
    • Can increase sales drop-off when users don’t respond to confirmation email
    • Allows a cooling off period from the sale and increases abandonment rates
    • Increases the accuracy of databases and provides opportunities to confirm terms and policies

The solutions above all have their benefits and drawbacks. At Email Hippo we specialise in pre-fraud detection because we think it's a vital tool for businesses that trade online and need to reduce fraud. 

Our service focuses on email address intelligence. When people (or bots) complete forms, our software makes checks about the characteristics of an email address, the domain it’s connected to, the location of the user and numerous other fraud ‘tells’. Our goal is to prevent fraud and allow businesses to have confidence about who they are doing business with. You can read more about our ASSESS pre-fraud solution here.

Financial Times 2020 report on Shopify



Written by: Lisa

Monday, 21 September 2020