Chargebacks 101: Stolen Cards, Friendly Fraud, and Security

The explosive growth of ecommerce is bringing wonderful changes for businesses and consumers alike: it can save time and offer a wider variety of products, it can be driven through multiple online platforms and social channels, and it is not bound by store open and close hours. In fact, Nasdaq estimates that by the year 2040, 95% of all purchases will be made through ecommerce. 

Alongside any new business opportunity for growth comes new opportunities for risk, loss, or fraud. The enormous growth of ecommerce has brought with it much higher credit card use, much greater occurrence of fraud, and a much greater need for efficient, comprehensive credit card verification systems. Chargebacks are the most common type of ecommerce fraud, as well as one of the most expensive types of fraud for retailers to battle. According to a 2021 survey of small and medium-sized businesses from around the world, 62% of businesses reported increased fraud attempts since the start of the COVID-19 pandemic.

What Are Chargebacks and Why Do They Occur?

Credit card chargebacks are consumer requests for payment reversal. Put simply, this means that banking institutions can charge back the amount of money from a disputed transaction to the business of origin and return that money to the cardholder. Ecommerce chargebacks occur for three primary reasons:

1. Credit card fraud: when a customer’s credit card information is stolen and purchases are made without their knowledge or consent, the customer can file for credit card fraud to request refunds from their issuing banks.

2. Friendly fraud: also known as first-party fraud, friendly fraud occurs when a customer disputes a charge, despite having made the purchase themselves. This type of fraud can be accidental or intentional. The consumer may have forgotten they made the purchase, not recognized the vendor’s name, been unsatisfied with the product or service, or requested a refund to try to get free products.

3. Merchant clerical errors: businesses may accidentally double or overcharge a customer, input customer information incorrectly, fail to communicate return policies, not use delivery confirmation, or forget to update websites or social media channels with accurate product descriptions and pricing.

When businesses charge consumer credit cards, and consumers later dispute those charges, a cascade of chargeback investigations within the payment chain are triggered. Because banks do not use credit card verification systems, nor do they need the original retailer’s approval to charge back transactions, retailers are assessed chargeback fees even if the claim is settled or withdrawn later, regardless of the reason for the chargeback.

In addition, retailers with a consistently high chargeback rate—even a chargeback rate of 1% can be considered unacceptable by many credit card companies—run the risk of being assessed penalties or being placed in monitoring programs by credit card networks, which means incurring even more fees for every new chargeback. Worst of all, an inability to lower high chargeback rates despite monitoring could lead to retailers losing their partnerships with credit card networks altogether.

Protect Your Business from Chargeback Fraud

At its worst, chargebacks can be the result of criminal activity and negatively impact partnerships with credit card companies. At its best, chargebacks come from innocent consumers making accidental purchases or changing their minds after purchasing. No matter the cause, chargebacks cost businesses excessive time and money to resolve, so avoiding them whenever possible through credit card verification is key.

EVS strongly recommends that retailers proactively implement and utilize fraud prevention tools like credit card verification systems that are built to handle chargebacks. Retailers that integrate credit card verification solutions are not only deterring criminal activity and protecting their business from chargeback fraud, but they are building trust with consumers and enabling them to feel safe when purchasing from ecommerce shops.

Quality credit card verification should include tools like multi-factor authentication (MFA), address verification service (AVS), and CVV validation. These tools can significantly reduce chargebacks and risk of fraud. EVS is a solution provider that offers customizable, scalable & automated solutions to prevent chargebacks and fraud. EVS offers a unique approach to credit card, identity, age, and phone number verification solutions that integrate with retailers’ existing processes and adapt to retailers’ operational requirements. If your business is searching for a credit card verification system that offers low monthly fees, low transaction rates, no setup fees, and no minimums, look no further than EVS’s product solutions.

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