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July 16th, 2020

COVID-19, Chargeback Frauds & Tips To Minimize & Control Them

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Digital advancements of payment, improved financial technology and in some ways the COVID-19 has led to the rise of ecommerce sales, delivery services and online retail sales. Transactions at physical point of sales have severely declined since most of the people are staying away from the markets and brick and mortar shops. This has been a major factor in the boost to online sales.

This also presents a serious situation since more online orders mean more refunds, returns and chargebacks. While most of the chargebacks may be genuine, they still hurt the merchants financially. Friendly fraud chargebacks are also increasing in frequency due to the present situation. According to a survey, purchases made online are 3 times more likely to be replaced or returned in comparison to in-store purchases.

According to the refunds policy, a customer can choose to return an item and in return ask for a replacement or refund within the given time period. If the business does not accept a refund/replacement request due to a damaged or used product, customers have the right to request for a chargeback which is very different from a standard refund. In a chargeback request a customer directly deals with the bank who that transfers the money from the merchant’s account to the customer’s account if the chargeback claim is not disputed by the merchant. This comes with high fees on the merchant’s part as they are the ones who bear the costs levied by the bank for the chargeback.

What are chargebacks and how do they work?

If a customer disagrees or finds an invalid or unapproved transaction from his or her debit/credit card then he/she can initiate a process with their bank account to get this money refunded. It is a mechanism that protects consumers from fraudulent and illegitimate merchants. They do so by acting as a protective shield between dishonest merchants and customers.

Chargebacks threaten the revenue of merchants and business owners big time. They are also one of the major reasons why businesses shut down or are unable to find a payment processor as higher frequency chargebacks can get your business classified as high-risk.

The chargeback process may vary from merchant to merchant but the overall process remains somewhat similar. Here is a general overview of the chargeback process.

1. The customer files a chargeback claim.

2. Customer’s bank checks if the request is genuine.

3. If the merchant does not dispute the chargeback, funds are withdrawn from the merchant’s account.

4. Funds are deposited into the customer’s bank account.

Merchants are provided the chance to dispute chargebacks by showing documents proving that the transaction was a genuine one. However, in most of the cases customers win this battle due to the ‘customer first’ policy of banks, issuers as well as merchants.

Ways of avoiding chargebacks:

Merchants can reduce chance of chargebacks by paying attention to small details. Here is a 3 part checklist that you can follow to minimize chargebacks for your business.

1. Satisfy your customer: Business owners can reduce the probability of chargebacks by ensuring transparency in information and by providing an excellent experience to the customers. This can be done by doing the following:
   A. Always set realistic delivery targets, keeping in mind any logistic delays etc.
   B. Make sure that customers receive products before or on the due delivery date.
   C. Be proactive in refunding the customer if you foresee any delays in delivery.

2. Provide an excellent customer service: Don’t give your customers a chance to complain and file for chargeback claims by always being upright and prompt in your customer service.
   A. Be prompt in providing updates and relaying any developments and information to customers.
   B. Avoid any hidden fees or shipping costs showing up at the last moment.
   C. Refund immediately when a customer asks for it.
   D. When the issuer asks for proof to dispute a chargeback, provide it immediately.
   E. Be quick in refunding a transaction when the issuer notifies you about it being a fraud.

3. Stay sharp and alert: Frauds are thefts and just like any other. To avoid them, being alert and on the lookout is the most basic and fundamental step.
   A. Keep an eye out for legitimate/genuine transactions that get reported as frauds. These are called ‘friendly fraud chargebacks.’
   B. Monitor all transactions without any exceptions.
   C. Keep on reviewing and updating risk settings to control frauds.
   D. Choose an efficient payment service that can effectively minimize frauds.

Tips for managing chargebacks, disputes and frauds:

Though chargebacks are critical, they can be a good thing for a business in the long run, if handled the right way. Here are some tips and tricks to manage chargeback frauds:

1. Constantly review chargebacks: Always keep a focus on chargebacks and if you find a discrepancy, report it with adequate proof. Remember, it is an ongoing process and you can’t be complacent at any point of time.

2. Set up a refund reserve: Exploring the possibility of establishing a ‘reserve fund’ can be entertained. This can be useful for sending refunds automatically in case of genuine chargebacks and refunds.

3. Fraud assessment effort: Put proper risk assessment profiles in place to ward off payment frauds such as account takeovers and refund/friendly frauds. Creating a fraud customer profile also helps.

4. Lookout for market changes: Card issuing authorities like Mastercard and VISa VISA have suspended their ‘excessive chargeback compliance program’ for the upcoming 4 months. Under this scheme, thresholds for classifying ‘normal’ chargeback risks are defined. This means that merchants may not be flagged even when exceeding the standard ‘chargeback-to-sales’ ratio.’ This means that merchants may suffer losses due to high chargebacks.


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