Industry

3 ways to fight chargeback fraud with IDV

Chargeback fraud is a growing problem for e-commerce companies, but there are practical ways to mitigate it.

Last updated:
11/5/2024
Read time:
Share this post
Copied
Table of contents
⚡ Key takeaways
  • Chargeback fraud is difficult to address because it can resemble a legitimate chargeback. 
  • Chargeback fraud is on the rise, because it’s relatively easy for criminals to perpetrate.
  • Using identity verification (IDV) can help strengthen the defense against unauthorized purchases, friendly fraud, and systematic chargeback abuse.

Chargeback fraud is one of the fastest-growing forms of online fraud. The volume of global chargebacks is expected to reach 337 million by 2026, a 42% increase from 2023, according to Mastercard’s Chargeback Trends and Outlook Report 2023. And global card-not-present fraud losses — which include chargeback fraud — are expected to climb over $28 million by 2026, increasing 40% from 2023. 

Originally designed to protect consumers from fraudsters, chargebacks are now a tool fraudsters can exploit, leading to significant financial losses for e-commerce businesses or any other business that conducts transactions online.

Fortunately, there are steps you can take to prevent chargeback fraud — even before it happens. How? Identity verification. Keep reading to find out why chargeback fraud happens, what it looks like in practice, and how you can minimize it. 

What is a chargeback?

Before going over chargeback fraud, let’s review chargeback basics. A chargeback is a reversal of funds that occurs when a customer disputes a charge with their bank or credit card issuer. 

One of the most common reasons for a chargeback is that a customer sees a transaction on their bank or credit card statement that they don’t recognize. This doesn’t always mean that the transaction is fraudulent. It’s possible that the transaction description is confusing, or that the customer may have forgotten they made a purchase, or that someone else in their household used the card to make a purchase. 

Sometimes customers initiate chargebacks if they’re dissatisfied with a company’s product or service, and the company itself won’t give them a refund. Customers may also look for chargebacks if a company makes an error in charging them (like continuing to bill them for a canceled subscription service), or the company’s refund or resolution process takes too long. 

What is chargeback fraud?

Chargeback fraud is when a customer disputes a charge with their bank or card issuer to reverse a payment, but the charge is legitimate. In this case, the fraudster aims to get the money back from the credit card company, while also keeping the product.

There are a few common types of chargeback fraud:  

  1. Friendly fraud (first-party fraud): Also called first-party fraud, friendly fraud is when a customer makes a legitimate purchase but later disputes the charge without trying to get a refund from the company first. They might claim they didn’t authorize the transaction, didn’t receive the product, or received a product that was different from what they were promised. Friendly fraud is both common and difficult to detect because the fraudster is often the legitimate cardholder.
  2. Stolen credit card fraud: This happens when a fraudster uses stolen credit card information to make a purchase, then the legitimate cardholder files a chargeback once they discover the fraudulent purchases. In this instance, the merchant loses both the product and the sale.
  3. Chargeback abuse: With chargeback abuse, a fraudster initiates chargebacks systematically, often using a fake or stolen identity to claim that they never received their products or that their products were defective. Their goal is to get their money back while keeping the product, causing a double loss for the business.

The danger of chargeback fraud

Chargeback fraud is tricky to deal with for a few reasons: 

  • As online shopping rates increase, so does the volume of overall chargebacks, making it hard to distinguish between legitimate chargebacks and fraudulent ones. 
  • Automated and anonymous online transactions make it easier for fraudsters to carry out chargeback fraud. 
  • Chargeback fraud doesn’t just cause merchants to lose revenue — it can also affect their reputations and relationships with payment processors. If your company experiences excessive chargebacks, your payment processor might impose penalties or suspend your account.  

Chargeback fraud versus refund fraud

It’s important to note that chargebacks and refunds aren’t the same thing. A refund is when a business returns money to a customer for a returned (or defective) product or service. A chargeback, on the other hand, is when a bank or credit card issuer returns money to the customer by extracting the funds from the company.

Refund fraud happens when a fraudster exploits a company’s return policy; chargeback fraud happens when a fraudster bypasses the return process at a company and goes straight to their bank or credit card issuer to dispute a transaction.  

Learn about the different types of refund fraud — and how to prevent them

How to mitigate chargeback fraud

When you’re operating an e-commerce business, it’s normal to expect a certain amount of chargebacks. Unfortunately, that means it can be difficult to prevent friendly fraud altogether (though there are plenty of practical fraud prevention strategies you should use). 

But when it comes to preventing stolen credit card fraud and chargeback abuse, IDV solutions can help. Incorporating IDV into your purchase journey is a preemptive way to fight chargeback fraud. 

IDV adds friction at key points in the transaction and dispute process, helping deter fraudsters. Plus, IDV tools collect a variety of risk signals beyond purchase data, giving you a better chance of detecting suspicious behavior and patterns of fraud early on. 

Of course, the friction that comes with IDV can also slow conversion. That’s why it’s a good idea to consider the dropoff IDV might cause, relative to its fraud prevention benefits. If your company regularly deals with chargebacks, the conversion tradeoff is likely worth it.  

Here are the three main ways an IDV solution can help with chargeback fraud: 

1. Prevent fraudsters from using a stolen credit card at checkout

Adding an IDV method at the point of purchase ensures that the customer using the card is the legitimate cardholder, helping to prevent unauthorized purchases that lead to chargebacks. IDV tools check customer details (like email, phone number, or address) against trusted databases for a lower-friction way to detect risk. Again, this is a preventive measure - it decreases the likelihood that you’ll see fraudulent chargebacks in the first place.

2. Reduce large-scale chargeback abuse 

IDV tools help reduce large-scale chargeback abuse by 1) adding validation at guest checkout and 2) flagging risky transactions. 

Though guest checkouts are convenient for customers, they increase the risk of chargeback fraud by letting fraudsters make anonymous purchases. By requiring a form of IDV during guest checkout, you can confirm the customer’s identity — even if they don’t create an account — and ensure the charge isn’t fraudulently disputed later. While this can introduce friction to the checkout process, the tradeoff is almost always worth it. You can also reduce friction by using an IDV solution that steps up friction just for risky users.

If you choose the right identity platform, you can also be alerted to red flags during the checkout process, like mismatched billing and shipping addresses, unusual order patterns, and high-risk locations. You can use that information to take proactive fraud prevention steps during the checkout process, like creating automated step-up verifications for suspicious behavior, or blocking high-risk transactions altogether. 

Related: Discover 3 tips for managing risk without sacrificing user experience

3. Strengthen chargeback disputes

You have to dispute the chargebacks you receive with your payment processor — and the process can be tedious. That’s why IDV is helpful. Persona’s IDV tool offers verified data for dispute resolution. 

For example, when a customer disputes a charge with your company, you can give your payment processor identity verification records (including email verification, phone number, and address validation) as proof that the transaction was legitimate during representation. 

Prevent chargeback fraud with Persona

Chargebacks are inevitable, but chargeback fraud doesn’t have to be. Using an IDV tool can help you keep stolen credit card chargeback fraud in check — and combat large-scale chargeback abuse. 

If you want help getting started with IDV, check out Persona’s step-by-step guide to implementing an IDV strategy. Or try out Dynamic Flow, a customizable workflow that lets you gather users’ identity information and adjust friction based on real-time risk signals. 

For hands-on support, reach out to schedule a demo.

Published on:
10/23/2024

Frequently asked questions

No items found.

Continue reading

Continue reading

How to protect your business against AI-based face spoofs
How to protect your business against AI-based face spoofs
Industry

How to protect your business against AI-based face spoofs

AI-generated face spoofs are challenging for humans and vision-based AI models to detect. Learn how to protect your business with a holistic strategy that goes beyond visual detection.

Share codes: Digitizing the UK right to work
Share codes: Digitizing the UK right to work
Industry

Share codes: Digitizing the UK right to work

Before any UK company hires a non-UK citizen, it must verify that the individual has the right to work in the country. Share codes are a key step in this process.

Workplace identity proofing: Methods & best practices
Workplace identity proofing: Methods & best practices
Industry

Workplace identity proofing: Methods & best practices

Workplace identity proofing can help employers mitigate risks associated with employment fraud. Here are 5 best practices to guide your identity proofing.

How to fight ID fraud in a world of generative AI
Industry

How to fight ID fraud in a world of generative AI

Learn how generative AI is changing the game when it comes to fake IDs and what you should be mindful of when enhancing your fraud strategy.

What is fraud prevention? And what are some key fraud prevention strategies?
Industry

What is fraud prevention? And what are some key fraud prevention strategies?

These days, fraud perpetrators don’t need to pick locks or break windows. Here's how to stop them.

Refund fraud: what it is, why it’s increasing, and how to stop it
Industry

Refund fraud: what it is, why it’s increasing, and how to stop it

Discover the many ways refund fraud shows up — and learn how to stop it.

Ready to get started?

Get in touch or start exploring Persona today.