Protecting Your Business from Chargeback Fraud

Giving cardholders the ability to initiate chargebacks is a banking policy that is intended to protect customers. It allows a customer to get a bank-initiated refund in case they did not receive an adequate product or service when purchasing with a credit card. It is also meant to protect against identity theft, and the financial loss that can occur due to stolen credit card data.

This policy can be abused through chargeback fraud.  But first, please note that there is a variant of chargeback fraud that is not necessarily malicious, where a customer simply does not understand the difference between a store refund and a bank-issued refund. In these cases, the customer simply assumes that a chargeback is a faster way to get a refund.

The malicious type of chargeback fraud occurs when an ill-intentioned individual is aware of the loopholes in the chargeback process, and abuses them for personal gain. An straightforward example of such a fraud would be a customer authorizing a credit card transaction, and upon receiving the goods, files a baseless chargeback.

In this case, the fraudster makes either of these claims for the chargeback:

  • The good or service was not delivered.
  • The good or service was dishonestly advertised, and as such did not meet the expected quality standards.
  • The merchant did not cancel a recurring payment upon request from the customer.
  • The customer did not authorize the initial transaction.

Chargeback fraud, in all its forms, leads to many headaches for the business involved in the transaction. It leads to wasted transaction processing fees, lost goods, inadequate use of resources, and chargeback fees. There is also a more serious long term detriment to repeated chargeback fraud: the business may lose the privilege of having a merchant account, and will no longer be able to accept credit cards.

How do you protect yourself against chargeback fraud?

With all of these tremendous detriments to your business, chargeback fraud prevention should be a top priority. While some strategies may require professional assistance, there are some tips which will help protect you from the majority of chargeback fraudsters. These tips include:

  • Notify your customers before charging for recurrent payments.
  • Have an easily recognizable billing descriptor so that customers will know who is charging them.
  • Use delivery confirmation.
  • Have a well-organized paper trail for each transaction.
  • Share contact information with your customers so your customers can reach you as easily as they can reach their credit card provider.
  • Communicate regularly with your customers.
  • Have a clear refund policy and feature it prominently on your website or at your store.
  • Offer justified refunds and cancellations immediately upon request.
  • If you notice suspicious activity or behavior from a client, avoid dealing with them.

Basically, your strategy should boil down to building a loyal customer base, and having the proof you need in case a chargeback dispute is filed. If you have procedures in place that will address the common chargeback claims, you should be able to reduce fraud and the damage that comes with it.

For more information on how to prevent chargeback fraud or to sign up for a merchant account, please call (888) 924-2743 or go to

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