Fraud, Chargebacks, And How They Affect Your Online Business
by Vladimir Tuporshin
Online merchants all over the world have to deal with fraudsters who are trying to
steal their products or services through bank or credit card fraud.
When a purchase has been made by a customer, and you have received the so-called
"authorization" from your credit card processor, it would seem logical simply to deliver
the purchased items. Unfortunately, that is not true.
Never forget that the "customer" may well be a fraudster who has entered other person's
payment credentials attempting to purchase the product or service with someone else's
money. The victim whose bank card has been used for such fraudulent payments will file a
claim to his⁄her bank to have the illegally withdrawn funds returned to his⁄her
account. This return of funds becomes a chargeback to the merchant whose product was
stolen by illegal use of the bank card.
Banks initiate chargebacks to merchants after receiving documentation from cardholders
that specific transactions were fraudulent. Funds are then withdrawn from the seller's
merchant account to be returned to the cardholder. In this way banks and payment systems
protect customers from unscrupulous online sellers and unauthorized use of their bank
cards. In addition to reversal of fraudulent payments, online merchants are assessed an
additional fee by their own processing banks.
Although it is the online merchants who pay very high fees to credit card processors
and banks, these companies offer no protection or assistance to merchants, who have had
their products or services stolen. Instead, the banks add insult to injury by adding the
chargeback fees which increases sellers' losses. Automatic detection software offered by
banks and card processors is ineffective; e.g., it notifies sellers of multiple card
attempts long after the merchant has already identified that issue.
The biggest danger is that if a company's business results in a large number of
chargebacks during some arbitrary period of time, its bank or credit card processor may
refuse to accept bank card payments to the merchant. You, the online merchant, are then
out of business.
For these reasons, we recommend verifying bank card payments before completing any
online purchase order. The person(s) responsible for this process should be fully aware of
how important verification of online payments is to the success and even the survival of
your online business. It is essential to pay close attention to all orders paid using bank
cards or via PayPal so that ordered products and services are provided only to genuine customers.
Below are some statistics which we have collected over the past five years from our
clients. Data is based on an analysis of 16,793 transactions.
6.17 percent (1048 of 16973) orders were flagged as suspicious and customers were
requested to provide copies of identification documents.
Over 46 percent (486 of 1048) of suspicious payment attempts turned out to be
fraudulent. Among them is a minor portion of genuine customers who refused to send copies
of documents as a proof of a valid transaction. Some of those clients later emailed to
explain their refusal; however, most of those who did not respond to verification requests
are definitely fraudsters who were using stolen bank card data.
Nearly 2 percent of orders (11 of 562) for which copies of identification documents
were sent still resulted in chargebacks. This group includes fraudsters who have
physically stolen somebody's bank card and⁄or its photo image and so-called chargeback
fraudsters. The latter type of thief may pay for their order and receive the ordered
product (mostly intangible such as software or media files) but then request a chargeback
claiming they did not order that product, and that their bank card must have been
fraudulently used by a third-party "hacker". A reliable way to counteract such behavior is
to store information about access to the purchased products. If a seller has solid proof
of such access, he can win a counterclaim against such chargeback fraudsters.
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