Chargeback Fraud & Illegitimate Chargebacks

A proactive and thorough plan to prevent and deal with chargeback fraud is a must-have for any business that accepts credit cards. Without an effective plan, chargebacks can become costly and a high chargeback ratio can even prompt a processor to cancel a merchant account.

There are various reasons why cardholders issue chargebacks. Some of the most common reasons for chargebacks are failure to receive a product in the specified time or products being misrepresented by marketing leading to customer dissatisfaction. Whatever the reason, the loss associated with a chargeback is magnified if a customer issues a chargeback after they've already received products or services. Chargebacks issued prior to the receipt of goods or services results in the loss of capitol and profit for a merchant.

If a customer disputes a charge for a product or service that they've already received, the merchant stands to lose capitol, profit and product. If the product or service is expensive this combination can amount to a substantial loss. An effective chargeback plan lessens the frequency of chargebacks and increases the likelihood of winning disputes when they are issued.

Chargeback fraud is difficult to combat with even the most comprehensive chargeback plan. Chargeback fraud occurs when a cardholder issues a chargeback with the intention of extorting products or services from a merchant. In a fraudulent chargeback scenario a cardholder has no basis for issuing a chargeback. The cardholder's motivation for issuing the chargeback is to steal products or services from a merchant by taking advantage of the chargeback system.

Unfortunately, banks unwittingly facilitate chargeback fraud by immediately reversing disputed transactions prior to contacting the merchant involved. By simply issuing a chargeback the cardholder has the battle half won. When a cardholder issue a fraudulent chargeback, they've received the product or service from the merchant, the bank has given their money back and they haven't even had to supply proof to support their chargeback claim. If the merchant doesn't respond to the bank's chargeback notice within a specified time frame that usually doesn't exceed 10 days, the cardholder will succeed in abusing the chargeback system for personal gain at the expense of the merchant.

Merchants have taken issue with the inherent problems and bias in the chargeback system for a long time but it doesn't look like banks will be changing their policies any time soon. In the meantime, it's imperative to include methods for preventing and winning fraudulent chargebacks in your chargeback plan.

The best weapon against fraudulent chargebacks is thorough sales documentation including sales receipts, signatures and proof of delivery (if applicable). Customers that issue fraudulent chargebacks have no substantial proof to support their claim. By maintaining complete sales records you greatly increase your chances of winning these potentially costly chargebacks.

If your business doesn't have a chargeback plan, make one. If you need some pointers to get started, there's helpful information available on chargebacks at merchantcouncil.org. Of course, even the greatest chargeback plan is ineffective if it's not followed for every credit card sale. Once you create a solid chargeback plan, be sure that everyone who deals with customers is familiar with it.

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