What is Chargeback Fraud?

When payment for a product or service is debited from the customer’s bank account and then the fraudster refuses to honor the transaction, the system automatically initiates a refund, called a “chargeback,” with the merchant’s bank. The merchant is paid by the merchant’s bank once they verify the transaction with the legitimate customer.

While it seems like a friendly process to process a chargeback, it is actually a painful one for the merchant and the customer. At its core, this chargeback system is built to prevent the merchant from losing money to fraudsters.

However, fraudsters will often employ several tactics to trick the system. Some of these fraudulent practices are outlined below.

How does it work?

Chargeback fraud works on a few simple methods such as:

Sending out identical invoices to different companies, some legitimate and some not.

Receiving email confirmations and email messages related to invoices that match, but which contain different items than the real ones.

Receiving payment orders by mail that have been issued in the name of the company that is impersonated.

Users can also download card carrying software on their computers or smartphones that will let them monitor all the electronic transactions. For example, you can set up a fake website and imitate the real one in order to make your fake websites appear very similar to the legitimate one and a victim will trust the fake website more because of its close resemblance to the genuine one.

Who are the victims of chargeback fraud?

According to the survey, many consumers say they've lost hundreds of dollars due to fraudulent chargeback cases, making it the most common type of fraud.

Who are the attackers?

Most of the attackers are identity theft entities. However, some of the fraudulent activity is carried out by small or medium-sized fraudsters.

What are the 2 reasons why they act like this?

1) The reasoning behind their actions may be based on the victims' reluctance to divulge their online banking information and their refusal to make online purchases from untrusted merchants.

2) The merchants should be blamed for shipping items in bad condition to address the concern of not keeping their packaged products fresh and alive for a longer duration of time.

Costs for chargeback fraud

As soon as chargeback fraud has occurred, it’s usually not hard to trace the fraud back to the original incident. This includes the perpetrators, the machines they used, and the money that was stolen. A typical fee for chargeback fraud is approximately $500 USD, making the average amount stolen approximately $380.

Logistics and transparency

Safeguarding customers against chargeback fraud requires that businesses take measures to secure their systems and personal information and maintain accountability and transparency. For these reasons, they need to invest in the proper tools and training, especially if the fraud activity has taken place in the physical presence of their customers.

Impact of chargeback fraud

When consumers encounter fraud or a chargeback, they have many questions. It is important for them to know what type of fraud they are seeing, so they can better identify it in the future. You can help them by answering some of their questions and clarifying how to file a chargeback.

Factors that can influence their experiences

The Internet and computer-based shopping are a convenient way to shop and complete transactions, and for the consumer this convenience can often be a draw.

However, what makes the transactions easy for the customer also makes it easy for the fraudster to trick and steal from the customer.

Groups of fraudsters are working together on cyber scams to perform multiple frauds on customers around the world.

Tips to avoid chargeback fraud

1. Ensure you have credit or debit card protection.

2. If you are on a card that does not offer card protection, always look for the protection coverage when you apply for a card or switch your account to a new bank.

3. Check that a third party provider is involved with the transactions.

4. Register your card and use your card rather than your wallet, or use a clear plastic bag.

5. Keep your card with you, or better still, write the card number on the back of your card and keep the number visible to others.