Comprehensive guide to chargeback frauds for payments. Here’s how MerchantRMS can improve their management

  • Author -- MerchantRMS

Chargeback frauds are tactical-level fraud activities involving the reversing of a payment for a product or solution without returning it back to the merchant. This directly results in inventory loss to merchants, while making the remediation process arduous and resource-intensive. Time spent in investigating chargebacks can be better invested in revenue generation, which is why merchants adopt technology solutions to reduce the risk of this fraud type. 

While there are legitimate reasons why customers may want to chargeback by engaging with their banking providers, a fraud event is a likely scenario when customers haven’t connected with merchants at all. Merchants can actively keep track of risky customer profiles that have leveraged chargeback methods to defraud them in the past. With the rise in different types of payment methods, such as digital wallets, cryptocurrencies, online cards, etc., the risk of chargeback fraud rises exponentially as well. 

Understanding the overall cost of chargeback fraud

The role of indirect costs - While there are direct losses attributed to key chargebacks on transactions, there are indirect and supplemental costs of chargeback frauds as well. Merchants should be aware of these indirect costs to acquire a more complete picture of the overall cost of chargeback fraud. Accumulating chargeback frauds or cyclical chargebacks can significantly deter a merchant’s ability to scale up across online and offline channels. 

Capturing resource loss - A critical cost factor involved in chargeback frauds is the loss of product inventory and resources. When customers retain purchased products and request a chargeback, merchants can lose inventory at scale. There are also associated shipping, logistics, and tracking costs that are involved in the processing of product purchases. 

Additional costs associated - The primary costs of chargeback fees, penalties, transaction fees, and authorisation fees, also need to be accounted for based on the type of chargeback requested. There are additional resources required to review, monitor, and track ongoing chargebacks, which can accrue towards significant limits as well. Operational costs may also be associated with processing chargebacks, involving multiple interactions with banks, supply chains, QC teams, etc. 

Key strategies in preventing chargeback frauds 

Risk analysts, merchants, and payment enterprises can focus on adopting automated technology solutions to prevent chargeback frauds. Key sources of riskier online payment methods can be identified and blacklisted actively for the prevention of fraud occurrence. The challenge is also enhanced in the case of card-not-present (CNP) transactions, where a significant portion of the overall risk is borne by the merchant. 

With 47% of companies experiencing payment fraud in the last 24 months, it is vital for businesses to protect themselves with the right strategies. A blended approach of the right technology solutions and policies can help with holistic protection against chargeback frauds. A dynamic database solution onboarded to prevent chargeback fraud can also help with the management of this growing security issue.

While card related payment disputes can occur in less than 1% of total transactions, they require a significant amount of time and strategic input on a regular basis. A structured pre-authorisation address verification service (AVS) solution should be implemented to ensure compliant payment processing. Technology solutions such as 3D-Secure 2.0, dynamic blacklisting, order validations, and behavioural modelling can also help streamline chargeback related issues. 

The critical role of a fraud prevention tool

Provision of a robust framework - Fraud prevention tools is vital to protecting merchants and payment enterprises from chargeback frauds. They provide a robust framework that companies can leverage to understand the role of analytics in determining consumer behaviour. Key anomalies can be detected and flagged instantly, providing merchants with the right tools for greater visibility. 

Analytics initiatives through anti-fraud tools - Fraud prevention tools also provide the right framework for analytics initiatives, to help drive better chargeback fraud detection. The introduction of fraud analytics can reduce fraud loss by up to 5% in mature environments and close to 30% in evolving industries. 

Better governance through technology - By analysing customer history, cart analysis, predictive modelling, and payment information analysis, merchants can have better control over chargeback fraud. They can also drive key governance initiatives to restrict chargeback frauds and measure their impact through data-driven analytics. 

Setting the right control measures - These tools also allow for the seamless setting of critical rules and confidence levels of chargebacks, thereby empowering administrators and recovery teams. Setting fraud alert levels too high can impact genuine sales across e-commerce channels while setting them too low can allow for an overflow of fraud potential. In fact, up to 25% of declined sales transactions for e-commerce merchants could be false positives, which is why companies need the right fraud prevention tools to help refine identification. 

How MerchantRMS can help manage chargeback frauds better

MerchantRMS provides the right set of tools, features, and expertise to prevent scale driven chargeback fraud. Through the strategic integration of rules engines, analytics, automation, and forensic investigation, our solution provides holistic transaction insights. Here are a few key benefits offered - 

1. All transactions are mapped within an intelligent analytics engine and reviewed for potential fraud activities. Instant flags are raised upon detection of potential fraud prior to an issuer authorisation. 

2. MerchantRMS generates fraud scores in near real-time after reviewing the information shared by customers on merchant portals. The score reflects the potential of fraud, while also ensuring the minimisation of false positives. Based on the transaction score, an allow, denied, or reviewed status is automatically applied to each transaction. 

3. TrustID (Device Fingerprinting Solution) is another critical component of our solution, being a complete invisibility covert platform for fraud detection. Devices used for transactions, regardless of registration, proxy, cookies, or IP addresses, can be reviewed for potential fraud activities such as chargeback frauds.  

4. Our solution also ensures fraud retargeting, to drive post-authorisation verification processes for comprehensive protection. Chargebacks are largely post-transaction processes that require comprehensive solutions for overall protection. Key user behaviours are logged into our solution automatically and referenced against hundreds of thousands of prior data points and cases. 

5. Through active handling of whitelisting/blacklisting, historical fraud trends, and chargeback data updating, companies can also drive predictive analytics. Merchants can predict the likelihood of a chargeback fraud based on the insights generated via the platform. Key identifiers and rules can be used to prevent the rise of chargebacks within critical Nexus systems.  

Reach out to us at P: +1 416 962 0542, E:, today to understand how our solutions can impact chargeback frauds for your company. Learn more about our services through our case studies, where we successfully lowered chargeback rates for an airline company from 0.34% to 0.01%. Request a free demo today, to unlock the power of MerchantRMS data-driven fraud management.