Definite Guide To Chargeback Fraud

Imagine this week your store made more sales than usual. Naturally, you feel confident about your brand: people love your products! 

Next week, you check your sales to see if there’s any new clients: you’re selling as much as you always did. But what about the sales spike? When you check, it still shows as a pending order.

“Well, everything should be fine once the product ships.” You assume.

When it’s finally the day to deliver the product, clients cancel and request chargebacks. Confused, you don’t know what went wrong. Don’t worry: it happens to everyone from time to time.

Wouldn’t it surprise you if several customers issued chargebacks on the same date for similar products? What if your refund rate goes through the roof, although you never dealt with quality issues?

Before you contact your supplier or delivery, ask yourself what could have gone wrong.

What Is Chargeback Fraud?

Some people issue fraudulent chargebacks to get free products. That could mean:

  • Buying with an expired/stolen credit card
  • Lying about the product condition to process a refund
  • Report an unauthorized transaction

Beware: not everybody who buys from you is a loyal client. Without security procedures, retail scammers can exploit these consumer rights and get free items. Although you do get them back sometimes, you’ve already wasted money on fees and shipping.

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Then, who are these people, and why do they target you?

Fraudsters like to target small stores, get free items, and then resell them. That usually means electronics, apparel, and collectibles. You’re likely dealing with identity thieves who pay with someone else’s credit card.

They often make large volume purchases since it’s not their money what they’re spending. The problem is, once scammers know your store is vulnerable to chargebacks, they will do the trick more and more often.

Red Flags

We wouldn’t be talking about these problems without a thoughtful prevention plan. First, we must differentiate legit from fraudulent chargebacks. We don’t want to affect real customers, but we can neither let scammers complete their orders.

#1 Multiple credit cards

Why is the same user registering so many credit cards? Having so many of them is financially impractical. Instead, he may have stolen a bunch of them, and now he tries to verify which ones work.

It’s called card testing. Scammers start making micro-purchases of the same product to validate dozens of cards. They discard the ones that don’t work: he’ll use the others for large volume orders.

#2 Large charges or quantities

When tracking sales, scammers show behaviors average clients would never do:

  • If they buy, say, 30 units of the same product, they’ll make 30 orders with different card numbers. Often, that quantity stands for the number of cards stolen.
  • They buy a large volume of luxury items from you as if you were a manufacturer, no matter how high the price.

Your suspicions are right: they’re not here to buy.

#3 Overnight shipping

Shipping costs remain the same for most products, except for dimensions and weight. A client will prefer to pay more for your items and qualify for free shipping. Most customers see the delivery expense as a burden and certainly won’t pay big money for it.

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Scammers, however, seem obsessed with receiving the item asap. They don’t mind paying up to $100 for overnight shipping, followed by overly-worried tracking questions.

Where do they ship? Usually overseas.

#4 Order data mismatches

There’s unclear/confusing information about who made the purchase and who receives the product. You expect the buyer to be the customer. However, scammers may:

  • Send dozens of products to the same address under different credit card numbers.
  • Send dozens of products to multiple addresses under the same card number.
  • Change the order details after it ships.
  • Deliberately ask to deliver to a hard-to-ship/untraceable location.

5 Most Common Chargeback Reasons

How do you know when a return is your fault, or it’s someone taking advantage? Here are the common chargeback reasons, both legit and fraudulent.

  • Item not received. Customers can report this issue even after receiving the product. To avoid it, track the product and make them sign the parcel.
  • Broken item. If you don’t record/inspect your inventory, you won’t know whether those complaints are right.
  • Product is different than described. It often happens with apparel and electronics, which include slight variations in color, model, or size. 
  • Billing dispute: bank errors, duplicate billing, incorrect amount billed, or expired card numbers.
  • Unauthorized transaction. The buyer didn’t want to order in the first place/ claims someone used his card without consent.

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The Three Categories

Especially the last one, it takes no effort for a dishonest client to make a chargeback. All variations simplify with three categories:

A. Friendly Fraud

These ones are the hardest to detect. In the eyes of the seller, friendly fraud looks like just another order. The client uses a valid credit card, buys a product, and completes the shipping. 

Once they receive the item, they play as a victim. They often express surprise, claiming they never authorized the order or forgot they did. But these excuses aren’t nearly as efficient as:

“Someone paid with my credit card without permission.”

It could be your familiar or your “friendly identity thief“. In any case, banks process the chargeback without question.

B. Merchant Error

This type stands for the best chargeback because it shows what you did wrong and what you can improve. Broken item? Not as described? It never arrived? You’re responsible for your product and service quality.

But still, merchant errors can turn into scams. Con men could complain about anything about your product: if you can’t prove they’re wrong, they win the chargeback. You can prevent it if you keep secure procedures, run inspections, and record packages until they sign the box.

C. Credit Fraud

Most sellers let it pass because it’s not a big deal. If a client wants a refund, you allow it: you let them take the product as long as they don’t bother you anymore.

Credit fraud is different. Once the thief has stolen a working card, they may buy dozens of your most expensive products, including the light-speed overpriced shipping.

The identity theft victim will soon find the expense on their account, and they’ll naturally report a chargeback. If the con man buys fast shipping and receives the item before the victim reports, they’ve just received free products. The victim recovers most of their money, but you, seller, are left with nothing.

Prevent The Scam: How To Win Every Chargeback

Apart from scamming, clients only ask for their money back for three reasons (from less to more common):

  • They ordered by mistake.
  • They wanted to test the product.
  • The quality didn’t meet their standards.

If you keep your quality high and track everything in your business, you will win the most common chargeback cases, including the fraudulent ones. Here’s how to do it:

#1 Ask for follow-up contact data

Before they complete the order, make them add contact information so that you can inform them about the purchase. Make sure customers receive your messages to avoid “ordered by mistake” scenarios.

On most platforms, shoppers have fifteen minutes before processing orders and charging the credit card. Then, they have a few hours or days before the product ships, and even after it ships, they still have 30-day guarantees. If you have to refund anyway, do it fast: the sooner you do, the more money you save.

#2 Improve your listing

If people are buying your product, then your listing may already have all the copywriting and keywords checked. Now, are you setting the right customer expectations? You can always add more clarity to your listing.

  • Be transparent— not optimistic— about what your product does. Clients can use any expectation gaps against you in chargeback scams.
  • If clients pay attention to detail, list all the technical/specific data at the beginning of your description and images.

You can also make refund disclaimers to bring confidence to shoppers while repelling scammers. Say something like:

“Premium quality guaranteed. We inspect every item and record every package, since the order until you arrive at your doorstep. If we don’t deliver, you have a 30-day guarantee.”

#3 Choose the right e-com payments software

Some Saas developers add anti-chargeback fraud features. For example, if someone makes too many orders or behaves suspiciously, the software will flag the account as suspicious.

It won’t disable them from purchasing, but they’ll require extra security steps to register:

  • Add a photo of yourself holding your ID document.
  • Update a bank statement issued within the last 90 days.
  • Verify with credit card PIN or use the trusted device for this account.
  • Complete the order with a virtual signature.

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Real clients won’t have any problem completing these steps. If they’re unfamiliar, customer support can guide them. It will keep identity thieves away.

#4 Always record the package

Especially when shipping to remote countries, the delivery may have affected product quality. When selling so many products and managing a large inventory, you never know what your products look like unless you record them.

Also, mention on the listing what security steps you follow. If scammers know you follow anti-chargeback measures, they will give up and look somewhere else. You’ll protect from false broken item claims, “item different than advertised,” “item not delivered,” or replica return switches.

#5 Show your refund policy where anybody can see it

If your clients weren’t aware of your policy, it doesn’t matter how much work you put on preventing fraud. What may seem evident as a seller may not be so for a buyer: avoid ambiguity and explain the context, no matter how obvious it is.

Wrapping Up

Although most of them are, not everyone who gives you money is a client. Some people buy by accident, and others just want to take advantage. In the credit fraud example, the scammer is making the order, but the victim processes the refund.

One last tip we haven’t mentioned: track your new customers. How did they find your store? Did you change your marketing tactic? Not only you’ll learn what caused chargeback fraud, but you’ll also know how to find your ideal customers.

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