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Published: November 20, 2019

What is Fraud and What Are Fraudulent Chargebacks?

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Tablet of Contents
While technology created the space that allows for seamless financial transactions between clients and merchants, it has also become a cause for abuse. It has provided another area of opportunity for potential criminals to leech on, most of which are fraudulent in nature.


Fraud has always been a danger to both supplier and consumer. In this case, payment processing companies and their clients are no exception. By definition, fraud involves the “false representation of facts, whether by intentionally withholding important information or providing false statements to another party for the specific purpose of gaining something.”


Since fraud can attack anyone at any time when misleading information is provided, it has now become one of the favorites among criminals to operate on. In 2017 alone, the United States experienced more than a 30-percent increase in e-commerce fraud attacks as reported by credit card reporting company Experian.


The alarming rate of attacks has definitely resulted to income losses that are higher than what most merchants want to care for, putting their business at risk. On the other hand, this has also become a cause for concern to cardholders who have fears that their sensitive card information may have leaked to the wrong hands. This is the reason any fraud-related crimes are now covered by civil and criminal laws to help curb the increase of fraudulent activity.


Fraud-related chargebacks: its nature and danger


To maintain stable merchant accounts, merchants must combat different kinds of fraud, and one of which are fraud-related chargebacks.


Fraud-related chargebacks usually start when cardholders begin to suspect that their credit card information has been compromised when transacting with merchants. Whether these claims are legitimately caused by fraudulent activity or not, they will then demand for the transaction to be reversed in a form of a chargeback.


Fraud-related chargebacks both affect merchants and cardholders and could happen in many ways. Generally, there are three categories that both cardholders and payment processing companies need to mitigate with chargeback prevention and management measures:


  • Actual fraud. In this scenario, both merchants and cardholders have been played by fraudsters. This happens when fraudsters steal and use information from legitimate cardholders to actually purchase goods from merchants. Since the actual sale and shipment of goods happened, resulting in charges to the real account holders, merchants have no other option but to refund the sale when the real account holders file a chargeback request with their issuing bank without any expectation that they could get the shipped items back.
  • Friendly fraud. Also called as chargeback fraud, this happens when authorized cardholders dispute seemingly legitimate charges to their credit cards, resulting to chargeback. Reasons could range from avoiding payment for the order in question, not remembering that they made such purchase, or another household member may have made the purchases using the real cardholder’s information without notifying them. While these are considered legitimate claims, they do not hold enough weight unlike that of actual fraud, but is still used by fraudsters to abuse on.
  • Merchant error or negligence. For this case, cardholders have become the victim of possibly fraudulent merchants when they fail to receive the purchases they paid for. These merchants either never shipped their ordered items, shipped out said items in bad condition, or shipped out the wrong items altogether. If merchants initially failed to provide the appropriate customer service to rectify the situation, cardholders can file a chargeback on that transaction.


Fraud-related chargebacks are probably one of the merchants’ worst nightmares as they could potentially lose clients and revenue in a snap. They also cause a bad reputation for the merchants: having chargebacks mean that they do not have enough security measures to prevent it, which could turn off more existing clients.


For cardholders, the actual process of filing for chargeback requests could be daunting on its own. It can also be terrifying for those whose sensitive information were compromised: if it happened once, it could happen again.


To initially mitigate this, merchants can start by maintaining a low level of chargebacks by utilizing payment processing software and hardware that could best protect the data of their customers.


Thankfully, technological advances have also provided effective ways of dealing with fraud-related chargebacks to ensure the security of both merchant and cardholder.


Agapay can help you learn more about fraud-related chargebacks and how to best protect your accounts from these attacks with better payment processing software and hardware. You may contact us here for more information.


Read more on part two: Mitigating Fraud with EMV Technology

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