Fraud and identity theft are a constant headline in the news today. It makes consumers nervous to spend money with debit or credit cards and that effect trickles down to merchants’ pockets through lower overall sales.  According to the Association of Certified Fraud Examiners, businesses lose up to 5% of revenues annually to lost products, profits, and chargebacks. The True Cost of Fraud report issued by LexisNexis goes into detail about the negative financial impact on businesses, and if left unchecked, how it can siphon off profits. These are just some of the many accounts as to how the safety and security of personal data greatly affect business, specifically e-commerce businesses. So what is fraud?


The Definition of Fraud

The simple Merriam-Webster definition of fraud is the crime of using dishonest methods to take something valuable from another person. However, fraud on consumer level is typically defined as stealing a person’s personal or payment information in order to obtain something. Fraud includes:

  • Unauthorized payment transactions
  • Unauthorized use of personal information, financial or otherwise
  • Unauthorized use of trademarks or copyrights
  • Fake refund requests
  • Exchange or resale of stolen or fake merchandise
  • Non-delivery of goods as promised

E-Commerce is particularly vulnerable to fraud because payment transactions are not face-to-face as they are in retail locations where security measures in addition to card swiping such as identification check and signature capture can be conducted. It is difficult to locate and take action against these internet criminals as many of them are internet hackers or technology experts that leave little or no trance behind often times on opposite sides of the world from where the theft took place.


Fraud usually leads to chargebacks and chargebacks cost businesses a lot of money in time and fees just to prove legitimate transactions. Unfortunately, it eventually affects the consumer as well. They end up paying higher retail prices because merchants as a whole have to pay for additional measures to protect against fraud and those costs of doing business effect retail prices. So it is in the interest of both merchants and consumers alike to protect their information from fraudsters.


Preventing Fraudulent Chargebacks

When a credit card customer files a chargeback claim, the credit card issuer investigates the claim. The merchant is automatically charged a fee and funds in the amount of the transaction in question are frozen until the merchant can provide whatever proof is requested from the issuing bank. If the merchant cannot prove that the transaction was legitimate they have the frozen amount deducted from their merchant account or bank account depending on given circumstances; however, the fee they were charged is non-refundable, win or lose.


Chargebacks cost merchants:

  • Excess fees
  • Monetary losses
  • Forced merchant account closures
  • Higher processing rates and fees to open new accounts from forced closures
  • TMF or MATCH listing

There are ways for merchants to fight fraud:

  • Keep documentation for up to one year from the date of the transaction. If you don’t have the documents to back up your case; you will lose and most consumer purchases can be charged-back up to six months after the transaction date and it can take an additional six months to rectify the dispute.
  • When shipping products use a courier that provides proof of delivery and keep that proof of delivery on file. If you have proof you delivered your goods and the consumer can’t prove they returned them – you almost always win.
  • Be responsive to customer complaints or returns. Customer service is your single best defense to not getting a chargeback.
  • Do not use any marketing practices that could be considered deceptive. If there is the slightest inclination that you deceived the consumer; you will lose the chargeback.
  • Make sure the terms and conditions of your sale as well as other policies are clear, concise, easily understood, easy to find, and fair if not favorable to the consumer. The consumer cannot win a chargeback dispute if it is obvious to anyone that looks that they knew what they were getting into.
  • Make sure you are taking and keep consumer payment information is a manner that is PCI complaint.
  • If you receive a chargeback dispute, respond quickly.  If a merchant does not respond in the allotted amount of time, they lost the chargeback.
  • Keep the 1 or 100 rule in mind. If you receive one percent of your total monthly transactions in chargebacks or more than 100 chargebacks in a given month; whichever comes first, you are crossing a threshold that puts you in a position to have your merchant account forcibly closed and possibly blacklisted by the merchant services industry.
  • Use Address Verification Services and Card Verification Codes. Obtain as much information as possible from the consumer in order to verify and prevent fraud from occurring in the first place.
  • Work closely with your merchant service provider. They have the tools and expertise necessary to fight fraud and chargebacks. It is in their best interest to help you, so don’t be shy to utilize their resources.

There is no substitute for responsible management. This is the first line of defense in the fight against fraud and chargebacks, but even the best, most responsible management can fall to criminal activities. However, adhering to the steps outlined above and being diligent with consumer payment information will go a long way toward protecting you consumers and the longevity of your business. Merchant service providers such as Painless Processing specialize in high risk payment processing with the experts, knowledge, and tools to assist any merchant with all of their payment processing or fraud deterrent, chargeback detection needs.


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