How Banks Can Effectively Manage Chargeback Fraud

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May 02, 2024

Originally published on the Fintech Herald.

Chargeback fraud has become a significant challenge in the digital age of commerce. It occurs when a cardholder makes a purchase with their credit or debit card and then requests a chargeback from the issuing bank after receiving the goods or services, claiming that the transaction was fraudulent or the product was never delivered.

In some cases, the consumer might have forgotten about the transactions, or a family member might have performed the transaction without their knowledge, the so-called “friendly fraud” or “family fraud”. However, in other cases, fraudsters might misuse the cardholder protection rules of the schemes to dispute legitimate charges to their cards.

Such dishonest practice is most likely to strike during peak shopping periods such as the holiday seasons, Black Friday, and Cyber Monday. During these times, transaction volumes surge, providing a cover for fraudsters to dispute legitimate charges. Retailers, already dealing with increased sales activity, may not have the time or resources to scrutinise these requests as closely, leading to higher instances of chargeback fraud.

This not only results in a loss of revenue for the merchant but also in additional fees and operational costs for card issuers and banks to process those claims.

The rise in chargeback fraud is worrying and hurting the whole payment ecosystem. First, it undermines the trust between consumers, merchants, and banks. Second, it increases operational costs for banks and merchants as they have to spend resources to process those chargebacks. Lastly, it potentially inflates prices for all consumers, as businesses often pass these costs on to their customers.

Card issuers and banks are at a critical juncture with the increasing prevalence of chargeback fraud. While the growing consumer awareness of chargeback rights has been beneficial in empowering customers, it has also opened the door to fraudulent disputes. Processing payment disputes is increasingly a burden on banks. We have observed small to medium-sized banks in central Europe with a team of 20-30 solely dedicated to managing fraud and cardholder disputes.

This situation calls for a careful balancing act. Banks and card issuers need to protect their customers from genuine fraud while also safeguarding themselves and merchants from illegitimate chargebacks.

What can be done?

#1 Streamline Fraud and Dispute Management Process

Most issuers agree that their existing internal processes and chargeback solutions do not allow for process automation or efficiency gains. Without improvement in their processes and internal tooling, there is a risk of having a huge backlog of claims that cannot be processed in time (chargeback is a time-sensitive process). Therefore, banks have to write off such fraud claims (refund the cardholders) without being able to analyse them.

By making the process more efficient and leveraging modern solutions to automate repetitive parts, banks can better allocate their resources and reject unjustified claims with no chargeback rights (e.g., an authorised Card Not Present transaction has no chargeback right).

#2 Incorporating Chatbots

To circumvent the costs and operational challenges of unjustified/fraudulent chargebacks, it is important to examine transactions and cardholder statements for signs of chargeback fraud. One way to do this is to leverage domain-specific chatbots that are built based on the dispute rules of payment networks. Such chatbots can challenge cardholders when they want to dispute a transaction that has chargeback fraud indicators, such as repeat transactions at the same merchant without previous disputes, card-on-file transactions, and purchases of digital goods on e-commerce platforms like app stores.

Striking a balance between rigorously investigating potential fraud and maintaining a positive cardholder experience is key. Therefore, offering in-depth transaction insights can serve as a powerful tool in identifying more concrete signs of friendly fraud, thereby facilitating a more effective and nuanced approach to dispute resolution.

#3 Provide in-depth Transaction Data Sharing and Security

Cardholders might initiate unjustified disputes over charges they don’t recognize due to forgetfulness, confusing merchant identifiers, or transactions made by relatives without their knowledge. To mitigate such claims, issuing banks can offer comprehensive transaction details, facilitating easier identification by the cardholder or prompting discussions among family members.

With the aid of services like Ethoca (owned by Mastercard) and Verifi (owned by Visa), it’s now feasible to equip cardholders with extensive transaction insights. This can include presenting an alternate name for the merchant, showcasing the merchant’s logo, and providing contact information, physical address, or specifics about the purchasing device. For certain retailers, it’s also possible to access a digital receipt outlining the purchased items or services. Such measures can jog the cardholder’s memory about the transaction, reducing the likelihood of unfounded disputes.

Rising Problem in a Digital Age

As digital transactions continue to grow, the potential for chargeback fraud also rises. By proactively addressing the challenges of this crime, banks can safeguard their operations, minimise losses and protect their cardholders.

The battle against chargeback fraud requires collaboration from all stakeholders in the payment ecosystem. By implementing these recommendations, issuing banks can not only mitigate the risks associated with chargeback fraud but also enhance their service offerings, fostering a safer and more trustworthy environment for digital transactions and a happier, more loyal customer base.

Related articles:

How Banks Can Effectively Manage Chargeback Fraud

What can be done?

Rising Problem in a Digital Age

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