Chargeback Fraud and Customer Experience

Chargeback fraud is a high-priced threat that too many companies view as another cost of business. One of the main reasons for this passive attitude is that some of the steps to prevent this type of fraud can result in additional friction points for the customer.

However, it’s possible to find a compromise between offering a seamless experience for the user and protecting your organization from the devastating effects of friendly fraud.

Understanding Chargeback fraud

Friendly fraud is a type of fraud in which a customer makes a purchase and later contests it. With chargeback fraud, scammers abuse a bank or credit card issuer’s policies to cancel charges. While customers should be able to cancel payments they didn’t authorize, fraudsters take advantage of this system to cancel charges and get something for free.

However, most businesses don’t discuss chargeback fraud. Making the issue public could result in a negative perception of a merchant’s customer service.

Additionally, with more than half of sales happening on mobile, it’s crucial to offer a fast and seamless experience with as few steps as possible.

As a result, a lot of organizations don’t take action because they believe that fighting chargeback fraud would add steps to the buying process. More customers would abandon their shopping carts and fewer would make repeat purchases.

The true cost of friendly fraud is difficult to assess. Indeed, these schemes are hard to tell apart from legitimate complaints from customers. However, experts believe that friendly fraud exceeded $130 billion in 2020. And with chargeback fees ranging from $20 to $100, failing to take action can be costly.

How to Address Chargeback Fraud Without Sacrificing Customer Experience

In the past, solutions like early 3D Secure systems felt clunky and introduced additional steps for customers. But now, it’s possible to implement a multi-layered process to fight friendly fraud without creating friction for customers.

An Integrated Approach

You need an integrated fraud prevention platform. Otherwise, implementing one-off solutions leads to a system where results are hard to track. You can simplify matters by centralizing your efforts to fight fraud into an integrated platform.

The same is true of data. In fact, siloed data can limit visibility and make it difficult to spot suspicious customers.

Risk Assessments

It’s important to tailor your fraud prevention efforts to the unique risks your organization is facing. To do so, we recommend assessing risks at every step of the customer’s journey and implementing relevant solutions.

1. Account creation

A good line of defense against first-party fraud is to focus on account creation. You can use consortium data to identify the IP addresses associated with scams and stolen identities.

AI and machine learning can spot inconsistencies when users create new accounts. An algorithm can detect factors like a single IP address creating several accounts on the same day. You can also spot red flags like accounts that share a shipping address.

2. Login

You can implement a two-step verification process to verify that the person logging in is the legitimate owner of the account.

Users will have to enter a code sent to their phone or email. This step verifies that a user has access to a specific phone or mailbox as a way of proving their identity.

3. Account changes

Account changes can indicate account takeover fraud. Scammers can gain access to legitimate accounts and use them to order merchandise. They will usually change the shipping address.

So, your system should automatically email users to let them know about these changes. Users should also have an easy way to report unauthorized changes.

4. Transactions

AI and machine learning can make transactions safer. You can look at different data points like a shopper’s IP address and location to spot inconsistencies.

The 3D Secure protocol is the best way to do this without affecting customer experience.

More About the 3D Secure Protocol

The 3DS protocol is a standard that merchants have to adopt in Europe. It’s optional in other regions, but it’s an effective line of defense against chargeback fraud.

It’s a user-friendly method that doesn’t introduce any additional steps for shoppers. During the checkout process, the 3DS server will connect to a server from the shopper’s bank. Then the two servers will exchange contextual data to verify the identity of the customer. This method ensures that the shopper is who they say they are, and it creates a record of the user authorizing the transaction.

With 3DS, the liability of verifying the shopper’s identity shifts to the bank. In other words, this means you are no longer liable for chargeback costs. Also, this protocol greatly reduces decline rates for a better customer experience. It results in fewer manual reviews for your fraud prevention team too.

How Fraud.net Can Help

Fraud.net can help you replace your rules-based fraud prevention program with a multi-layered protection system to fight friendly fraud. Here are some of the tools we offer:

• Our platform delivers first-party fraud monitoring capabilities. You can track customers and their outcomes across several merchants. You’ll be able to see who has a history of disputing transactions or returning items.
• Thanks to powerful analytics and data mining features, you can use customized algorithms to uncover hard-to-detect chargeback fraud.
• We offer a Linked Entity Analysis tool that looks for shared data points to uncover organized fraud.
• Our Collective Intelligence Network gives you access to anonymized fraud data from merchants all over the world to identify known fraudsters.
• We have partnered with PAAY, a 3DS software provider, to address friendly fraud holistically and give you access to a 3DS protocol that uses almost 150 data points to authenticate customers.

Contact our experts today to schedule a demo and learn more about fighting chargeback fraud.