Chargeback: fraud or repent?

As the Covid-19 pandemic caused a sudden change in consumption habits and dragged millions of people into an online existence, e-commerce has been experiencing an extraordinary boost: more users, more sales, and more transactions.

But also more investment in improving platforms, in integrating local and alternative payments, and, inevitably, in customer assistance and conflict management. Fraudulent behavior has increased, and it is urgent to address chargebacks – threats and alternatives.

Chargebacks and its impact on e-commerce

A chargeback is a return of money spent on a payment or a purchase made by debit or credit card, and it occurs when the cardholder reports to the bank, or the card issuer, one of the following:

  • the unauthorized use of his card, therefore the non-recognition of the transaction
  • the products or services weren’t delivered
  • the product is defected or doesn’t match the description
  • the transaction doesn’t comply with the legal terms

After verifying the cardholder’s complaint is legitimate, the bank or the card issuer returns the transaction amount back to the cardholder, and debits the merchant the payment, charging an additional fee.

Chargeback plays a decisive role in building trustworthy relationships with customers and good shopping experiences. But when it occurs consistently, chargebacks have a negative impact both on the company finances and their relationship with the financial institutions:

  • loss of product value
  • no-return investment on resources to check and dispute the chargeback
  • fees and penalties
  • loss of merchant account if chargeback ratio is too high

Although the underlying purpose of a chargeback is to safeguard consumers’ interests, the fact is that shoppers take advantage of this legal procedure to obtain products and services without paying for them.

Legitimate chargeback and frauds

It becomes crucial for companies to learn to distinguish legitimate chargebacks from fraudulent acts to understand the risks to which their businesses are exposed. So, what are the most common types of fraud?

  1. Auto fraud, friendly fraud or family fraud

Also called accidental fraud, it’s considered a result of a misunderstanding, and it occurs when one of the following happens:

  • a family member makes a purchase using the debit/credit card without the cardholder’s knowledge
  • the cardholder forgets he/she made a purchase
  • the cardholder forgets he/she authorized a recurring payment, such as a subscription
  • the cardholder misunderstood the purchase legal terms and conditions, I.e., merchant’s return policy
  1. Chargeback fraud

Chargeback fraud occurs when someone makes a purchase, keeps the product but asks for a refund, falsely claiming that it doesn’t match the retailer’s description or that third parties have misused the card.

  1. Effective fraud

Of a more serious and complex nature, the effective fraud involves a crime: criminals shop online using stolen cards, either they are in physical possession of the card or they have unauthorized access to the cardholder personal data.

  1. Phishing

One of the greatest threats to electronic transactions and, consequently, to e-commerce is the illegal obtaining of confidential data from both companies and consumers for a criminal purpose.

The awareness of these scenarios will allow merchants to develop strategies to minimize them and improve the relationship of trust with their customers.

How can companies protected it selves from fraud

There are procedures and solutions to help prevent or avoid chargebacks to become a vehicle of fraud or inadvertent misuse. Regarding procedures, these include keeping detailed customer records and account histories, requiring signature or delivery confirmation for each order, or integrating a processor to verify customer’s payment information, to name a few.

As for solutions, they range from insurance to full fraud protection programs. We highlight two:

  1. Chargeback guarantee or insurance

Reimburses merchants for all losses resulting from fraudulent chargeback-related transactions. It allows better cash flow management and chargeback cost control. However, it can have limitations on coverage, such as friendly fraud.

  1. BoaCompra Refund

BoaCompra Refund is an alternative operation that saves the merchants resources and money since there are no fees, and each case is analyzed and resolved by payment experts.

Partnering with BoaCompra

As e-commerce experts, BoaCompra and PagSeguro offer their business partners a set of unique advantages that enable companies to create trustworthy business relationships and good shopping experiences, such as:

  • a robust risk analysis
  • expertise on preventing, handling and disputing chargebacks
  • updated with the latest security stands and PCI compliance
  • Payment solutions and integration with local, alternative payments