friendly fraudMost businesses and business owners know that a high chargeback ratio will hurt your business. But what they may not realize is that more than 80% of claims filed for a chargeback are attributed to “friendly fraud”. In other words, only about 20% of chargebacks claimed are due to actual theft and use of stolen credentials. However, those numbers have been increasing. Especially with companies that make it easy for the fraudster to get their foot in the door.

With increasing numbers of true card-not-present fraud, as well as a rise in consumer abuse of the chargeback process, it’s more important than ever to take an inventory of where your company lies. Once you know your chargeback ratio, take a proactive approach to manage and reduce your company’s fraud incidence.

In Consequences Part 1 we talked about what a chargeback is and how a high ratio can potentially affect your business for the worse. Today, we are going to continue that discussion by diving into the various ways merchants can fight back. We’ll learn what steps can be taken to help stop chargeback incidences before they happen, and how to manage the ones that do.

Reduce your chargeback ratio by disputing illegitimate claims.

Unfortunately, disputing a chargeback claim is a tedious process that takes not only time, about 2 hours per incidence but also quite a bit of money. However, it is still a very important part of managing your business. It is critical to make the effort the look into your chargebacks, determine which ones are legitimate and which are likely a case of friendly fraud and take the time to dispute the chargeback claim when you believe the charge was processed for a legitimate purchase.

You must be able to present what the bank considers “compelling evidence” in order to dispute a chargeback. Fortunately, this is also the information you would be collecting to help you determine if a charge is for a legitimate purchase because this type of information is what helps to flag a purchase that is potentially fraudulent.

Every merchant should be keeping detailed records of all transactions.

Records of the purchase should include any and all information that you can acquire including a detailed merchant receipt, purchase time and date, and possibly any previous purchase history information they may have from the customer. There should be a detailed description of the goods or services including proof of delivery date and proof of download if it was a virtual product. Some POS software can be configured to record internal and external data such as the IP addresses, device ID, email and billing addresses, and geolocation of the cardholder.  In this way, a merchant could potentially prove that a purchase was made from a laptop, at the cardholder’s address proving that purchase did, in fact, initiate at their address, for instance.

Making sure that you have accurate, detailed records and tending to chargeback claims in a timely matter will go a long way to reducing your lost income, but it does not lower your total chargeback incidence. And that is the number the bank and the card brands are concerned with.

Fortunately, there are also a few simple steps you can take to reduce your incidence of chargebacks before they happen.

While it is important to catch fraudulent situations while they are happening, it is perhaps more significant to take steps to keep the fraud from knocking on your door in the first place. A good fraud prevention strategy will employ the use of both technical and human elements in order to reduce the possibility of a chargeback and achieve more balanced chargeback ratios. Through the use of in-house chargeback prevention strategies, software, machine learning, and collaboration with fraud experts working together with merchants, it is possible to recognize anomalies in purchases in addition to recognizing real customers.

Friendly Fraud chargeback prevention strategies start at home with your website.

The first place begins with your product and product descriptions. Make sure the customer knows what they are getting and gets what they thought they were getting. Be thoughtful when creating product descriptions, be as detailed as possible. If your product is a download or service, make sure it delivers what was promised. Many times the reason for “friendly” type fraud is that the customer feels the product is unsatisfactory or was not accurately represented on the site.

Lack of communication is another large contributor to consumer chargebacks.

Adopting features that provide more transparency in the process is an easy way to garner trust from customers and reduce the chance they’ll be frustrated with the process. Many consumers forget they ordered a product or don’t recognize the name of the business by the time they get their statement.

Clear and continuous communication lines between the merchant and the customer throughout the purchase and delivery process not only creates a paper trail but also goes a long way to keep them from disputing a charge. Providing them with regular updates about the status of an order can reduce friction as well as optimize the entire purchase process. Be sure to provide customers with an order confirmation, tracking number, delivery time, as well as empowering them to log in and see what’s happening in their account.

Utilize the powerful tools available to each merchant from Visa/MasterCard to help to reduce fraud and flag potentials such as CVV and AVS. Implementing Card Verification Value (the three-digit code on the back of the card) helps to prove the card actually exists and was not virtually duplicated. The Address Verification Service, or AVS, is a feature that verifies that the billing address on file for the card matches the one that is being used by the purchaser. Both features help to flag a potential fraud situation before it happens.  

In the case of subscription services, where there will be a need for recurring billing, take steps to make it painfully clear to the consumer who is signing up. Make sure to include in bold type that the purchase will be a “recurring transaction” as well as the frequency of the transaction. Place a checkbox on the purchase page for customers to agree to the terms of the purchase. All purchases should not be able to process until the customer has checked the box and essentially “agreed” to terms of service. This way it is much more difficult for a customer to say, even psychologically, that they did not know it would be recurring.

One of the most common codes used for a chargeback is the one for the customer “not recognizing the merchant”. This is so avoidable it is almost ridiculous, but it happens all the time.  This happens when the cardholder gets their statement and cannot recognize the merchant descriptor on their bill and assumes immediately that someone stole their card.

Many merchants make the mistake of thinking they don’t need to make sure both website URLs or a customer service number appear on the customer’s statement. Sometimes they use a different DBA the customer doesn’t recognize. This only adds to a customer’s feeling that it could be a fraudulent charge. The more merchants are transparent about who they are and how to get ahold of them, the more legitimate it feels for the consumer. It also gives them the opportunity to reach out directly before deciding to make a chargeback claim.

Since friendly fraud is the largest contributor to your chargeback ratios, these steps will go a long way to preventing this type of fraud. And, in the end, have a positive impact on your overall chargeback ratios.

Don’t go it alone, tap into the expertise and knowledge of a good Merchant Service Provider to help reduce chargebacks.

Lastly, it is important to make sure you work with a merchant processor who is educated in the ins and outs of high-risk processing. There are advantages to working with a payment provider with the knowledge and experience to advise you on how best to manage chargebacks for your particular business model. A Merchant Service Provider who has an intimate understanding of the inner workings of the financial industry will better be able to keep track of the continuously changing and updating Chargeback rules and regulations.

Merchants will need to audit transactions for flags to potential chargebacks. Keeping an open line of communication between you and your processor can help make the chargeback process a bit less painful too. Some chargeback disputes qualify for automatic representment by the acquiring bank-the bank who holds the business’s merchant account. So check with your processor and make sure the acquiring bank is involved and determine if they are possibly already handling it.

Managing chargebacks effectively requires a combination of expertise and tools to employ the right strategy.  Then regularly surveying the reporting information you’ve been tracking and storing in order to gauge performance.

Every business is different, their risk is different, and a strategy should be tailored to each company’s specific needs. There is no one size fits all when it comes to chargeback management. To help create the perfect chargeback management strategy for your particular business, give the ETA Certified Payments Professionals at Bankcard Brokers a call today.

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