Chargeback Fraud: What Is It and How Can It Be Stopped?

Chargeback fraud occurs when customers dispute a charge with their bank or credit card company, claiming they didn't make the purchase or are unsatisfied with the product or service. Customers can often get the charge reversed, even if they've already received the product or service.

Chargeback fraud is a serious problem for enterprise-level companies expanding in Africa. According to a 2022 report by ACI Worldwide, Africa had the highest rate of global fraud losses in 2021. This is due to several factors, including high rates of fraud in the region, the growing popularity of online shopping, and the difficulty and expense of disputing chargebacks in Africa.

The cost of chargeback fraud to businesses can be significant. In addition to the lost revenue from the disputed charge, businesses may also be charged a fee by their bank or credit card processor. Chargeback fraud can also damage a business's reputation and make it more challenging to attract new customers.

In the rest of this post, you will learn about chargeback fraud and how to stop or prevent it.

What is chargeback fraud?

Chargeback fraud is a type of fraud in which a customer disputes a legitimate charge with their bank or credit card company. Customers may claim they did not purchase or were unsatisfied with the product or service. In either case, the bank or credit card company will typically refund the customer's money, and the merchant will be responsible for the loss.

The customer themselves or a third party who has stolen the customer's credit card information can both commit chargeback fraud. The customer may have a variety of motivations when engaging in customer-initiated chargeback fraud, including: 

• Buyer's remorse: The customer may regret making the purchase.

• Financial difficulties: The customer may be unable to afford the purchase and want their money back.

• To avoid paying for a product or service: The customer may have received the product or service but does not want to pay for it.

Organised crime groups typically carry out third-party chargeback fraud. These groups may steal credit card information through phishing scams, data breaches, or other means. Once they have the customer's credit card information, they can use it to make fraudulent purchases and dispute the charges with their bank or credit card company.

Chargeback fraud can significantly impact businesses. In addition to the lost revenue from the disputed charge, businesses may be charged a fee by their bank or credit card processor. Chargeback fraud can also damage a business's reputation and make it more challenging to attract new customers.

Why is chargeback fraud a problem?

Chargeback fraud is a problem for businesses of all sizes, but it can be especially costly for enterprise financial institutions, banks, e-commerce and card-issuing companies building and expanding in Africa. Here are some of the reasons why:

High rates of fraud in Africa

Africa has the highest rate of global fraud losses, accounting for 14.4% of all fraud losses in 2021. It is due to several factors, including high poverty levels, unemployment, and corruption. Another factor is the growing popularity of online shopping in Africa, which has created new opportunities for fraudsters.

Difficulty and expense of disputing chargebacks in Africa

The chargeback process in Africa can be difficult and expensive for businesses. The chargeback process can vary from country to country, and businesses may need to hire local lawyers to represent them. Additionally, many African countries have weak consumer protection laws, making it difficult for businesses to dispute chargebacks successfully.

Damage to reputation and customer loyalty

Chargeback fraud can damage a business's reputation and customer loyalty. When a customer disputes a charge, the merchant is typically held responsible for the loss, even if the charge is legitimate. It can lead to negative reviews and social media comments, harming the business's reputation. Additionally, customers who have experienced chargeback fraud may be less likely to do business with the merchant in the future.

Financial losses for businesses

The direct financial losses from chargeback fraud can be significant for businesses. In addition to the lost revenue from the disputed charge, businesses may also be charged a fee by their bank or credit card processor. Businesses may also need to invest in additional fraud prevention measures, which can add to their costs.

What are the costs of chargeback fraud?

The costs of chargeback fraud can be significant for businesses. In addition to the lost revenue from the disputed charge, businesses may also be charged a fee by their bank or credit card processor. Chargeback fraud can also damage a business's reputation and make it more difficult to attract new customers.

Chargeback fraud can be costly for businesses, both directly and indirectly.

Direct costs of chargeback fraud

The most obvious direct financial loss from chargeback fraud is the lost revenue from the disputed charge. However, there are other direct financial costs associated with chargeback fraud, such as:

• Chargeback fees: Banks and credit card companies typically charge merchants a fee for each chargeback dispute. This fee can range from $20 to $100 per chargeback.

• Interchange fees: Merchants must also pay interchange fees to the issuing bank for each credit card transaction. When a chargeback is successful, the merchant is not refunded the interchange fee.

• Refund processing fees: Merchants may also have to pay refund processing fees to their payment processor.

• Cost of goods or services: If the merchant has already shipped the product or provided the service to the customer, they will still have to bear the cost, even if they are unpaid.

Indirect costs of chargeback fraud

In addition to the direct financial losses, chargeback fraud can also have several indirect costs for businesses, such as:

• Lost time and productivity: Employees must investigate chargeback disputes and respond to chargeback requests, which can divert time and resources away from other important tasks.

• Damage to reputation: Chargeback fraud can damage a business's reputation, making attracting and retaining customers more difficult.

• Increased risk of merchant account termination: A company's payment processor may terminate its merchant account if it has a high rate of chargebacks. It can make it difficult or impossible for the business to accept credit card payments.

Total cost of chargeback fraud

A study by Chargebacks911 found that the total cost of chargeback fraud to businesses is 2.5 times the amount of the disputed transaction. This means that a business that experiences a $100 chargeback will actually lose $250.

Best practices for preventing chargeback fraud.

Chargeback fraud is a serious problem for businesses of all sizes, but it can be especially costly for enterprise-level companies expanding in Africa. Businesses can protect their bottom line and reputation by taking steps to prevent chargeback fraud.

Here are some best practices for preventing chargeback fraud:

Clear communication and transparency

• Detailed product descriptions: Provide accurate and comprehensive descriptions of products or services.

• Transparent policies: Clearly state return, refund, and shipping policies on the website.

Robust transaction verification

• Two-factor authentication (2FA): Implement 2FA for all transactions to confirm the customer's intent.

• Digital receipts: Send detailed receipts and order confirmations via email or SMS.

Customer service excellence

• Prompt response to inquiries: Ensure quick and effective responses to customer service queries.

• Easy dispute resolution: Offer a straightforward process for resolving disputes internally before they escalate to chargebacks.

Use of advanced fraud detection tools

• AI and machine learning: Employ advanced algorithms to detect unusual patterns that might indicate fraud.

• Transaction monitoring: Continuously monitor transactions for signs of fraudulent activity.

Secure payment gateways

• PCI DSS compliance: Ensure payment gateways comply with the Payment Card Industry Data Security Standard (PCI DSS).

• Secure Socket Layer (SSL) certificates: Use SSL certificates for secure data transmission.

Data analysis and record-keeping

• Maintain transaction records: Keep detailed records of customer interactions, purchase history, and transaction data.

• Analyse chargeback trends: Regularly review chargeback incidents to identify patterns and refine strategies.

Educating customers

• Awareness campaigns: Educate customers about the implications of chargebacks and encourage them to contact the business first in case of issues.

Regular training for staff

• Employee training: Train staff on the latest trends in fraud prevention and the importance of meticulous record-keeping.

Building a chargeback representation strategy

• Representment preparedness: Prepare to contest unjustified chargebacks with compelling evidence and documentation.

Implementing the strategies

• Collaboration across departments: Ensure marketing, sales, customer service, and IT departments work cohesively to implement these practices.

• Leveraging Technology: Invest in technology that detects fraud and enhances transaction security.

• Regular policy review: Continuously review and update policies to adapt to new fraud trends and regulatory changes.

Conclusion

Chargeback fraud is a significant issue for businesses, but it is avoidable by taking the necessary precautions. By implementing strong authentication measures, monitoring transactions for suspicious activity, and responding to chargebacks promptly and professionally, businesses can protect themselves from the financial losses and reputational damage associated with chargeback fraud.

Fortunately, things are much easier with Smile ID, Africa's leading digital identity verification, fraud detection, anti-money laundering, and KYC compliance solution. With its high accuracy rates, regulatory compliance, and experience working with major African companies, Smile ID is a trusted partner for businesses of all sizes.