Online e-commerce fraud needs no introduction. With the advent of modern technology, seamless payment modes and flexible regulations, processing online purchases is getting easier by the day.

However, this also has a dark side. It has become increasingly easier for cunning fraudsters to find loopholes in order to dupe online merchants. 

One such loophole is chargeback fraud, also popularly referred to as friendly fraud.

Unfortunately for us, there’s nothing friendly about friendly fraud.

What is chargeback fraud?

Chargeback fraud occurs when a consumer makes an online shopping purchase with their own credit card and then requests a chargeback from the issuing bank after receiving the purchased goods or services. 

Once approved, the chargeback cancels the financial transaction, and the consumer receives a refund of the money they spent. And the tricky part? When a chargeback occurs, the merchant is accountable, regardless of whatever measures they took to verify the transaction.

What can risk analysts do about chargeback fraud?

The primary goal for a risk analyst is to identify the source of a risky online payment and mitigate ways to overcome it. 

In order to do so, the analyst attempts to discover whether the order was placed by the authorized cardholder or a fraudster who’s using the legal cardholder’s information. 

Seems pretty straightforward, right? That’s the case for most scenarios, but not chargeback fraud.

For this small subsection, the authorized cardholder and the likely fraudster is the same person. This is known as friendly fraud and is nearly impossible to detect in a cash-driven market like India. 

Let’s now address some of the pain points that Indian business owners face while fighting chargeback fraud and the possible solutions that can be devised for the same. 

What are the types of chargebacks?

Though chargeback fraud is an umbrella of different activities, in order to mitigate it, it’s important to take a step back and evaluate the different disputes that a merchant can face from a chargeback. 

Actual fraud:

This is perhaps the most obvious reason for chargeback and the most common, too. A fraudulent customer used a legitimate cardholder’s information, made a purchase from a merchant and the merchant shipped the order to the fraudster. Upon reviewing their transaction statement, the authorized cardholder identifies a charge as illegitimate due to fraud and files a chargeback, requesting a refund.

Merchant error:

In this case, when the customer places an order on the website, the merchant either never ships out the order or ships out an item that was broken or different than described. This causes the frustrated customer to file for a chargeback compensation.

Friendly fraud:

A chargeback or friendly fraud is the reversal of payment made through debit/credit card by the user, which is debited directly from the bank account of the e-commerce seller. Chargeback enables the consumer to get his/her money back and protects them from fraudulent sellers online.

Under what cases can a consumer file for a chargeback?

There are numerous instances in which chargeback can be availed by the consumers from e-commerce seller. These instances include:  

  • The Quality of the product or services received were not as advertised by the seller at the time of purchase.
  • The consumer claims that he/she has fallen victim to identity theft or has not sanctioned the purchase.
  • There has been some mistake in the Billing amount, or there are issues regarding duplicate billing of a purchase made.
  • The product or service purchased were not received by the consumer.

How is chargeback misused?

Chargebacks are created to protect consumers from deceitful sellers online, however, this option for refund has been grossly misused by fraudsters in recent years. Criminals have found loopholes in the chargeback process and intentionally misuse the option to swindle e-commerce businesses of millions in revenue!

A person commits chargeback fraud by authorising a credit/debit card transaction, receiving the product or service, and later filing a false chargeback request to get the item for free. Common chargeback frauds suffered by e-commerce sellers include:  

  • The purchased product or service received is claimed to be undelivered
  • The original transaction authorised is claimed to be unauthorised
  • The genuine product or service received is claimed to be faulty or deficient

What is the extended impact of chargeback on businesses?

E-commerce sellers are hit hard by chargeback frauds in the past years with the increase in digital payments and approval of credit card purchases. Online sellers not only lose a big chunk of their revenue to chargeback frauds, but their reputation and goodwill is also damaged immensely. 

The fraudulent consumers not only defraud the seller with false chargebacks but also end up leaving erroneous reviews and ratings, further injuring the business. In many cases, the bank in which the seller has its account ends up blocking the seller’s account thinking they are not genuine.

What’s the way out?

There are numerous ways through which e-commerce sellers can fight chargeback frauds; the simplest being a clear return and refund policy on the website or app. The business must keep clear records of each transaction performed, and copies of every bill or invoice sent. 

A more advanced and reliable solution is to leverage technology. In the era of skyrocketing advancements and artificial intelligence, the smartest way to deal with chargeback frauds is to use fraud prevention tools that can keep a record of everything without affecting your time.

How can Razorpay Thirdwatch help you?

E-commerce fraud prevention tools like Razorpay Thirdwatch enable online platforms to detect multiple kinds of frauds and abuses, including chargeback fraud in real-time. 

With AI that utilises the power of natural language processing and predictive analysis, Thirdwatch is able to detect fraud by scanning each transaction on hundreds of variables.

Razorpay Thirdwatch is a powerhouse that quarantines fake or fraudulent transactions by marking them ‘red’ and approves genuine transactions by flagging them as ‘green’ transactions. It also evaluates and maps every device through which a transaction is made, its own ‘fingerprint’ to check future transactions made through it.

E-commerce merchants need to be aware of the different frauds that cause losses and employ intelligent measures to detect and prevent them. With Thirdwatch, business owners can now focus on their growth and leave the hard labour to us!

Install Razorpay Thirdwatch today and simplify e-commerce like never before!