Chargebacks are not fun. Fraudulent Chargebacks are simply Infuriating.

If you’re in the retail or e-commerce business, you’ve likely had the unpleasant experience of a chargeback. A chargeback is when a customer has a complaint but usually can’t get a refund from the seller, so the customer asks the bank issuing the credit card for the funds back. While any chargeback can be frustrating, a fraudulent chargeback can be infuriating. As it relates to fraudulent chargebacks, you might have heard the terms: “true fraud”, “friendly fraud”, or “chargeback fraud” used to describe a specific type of fraudulent chargeback. But what do these terms really mean?! And how can each one potentially affect your business?

  • True fraud is another name for identity theft. Someone makes an in-store or online purchase using a stolen credit card, which the merchant accepts. The genuine cardholder disputes the charge, the card account is closed, and a new account number and card are issued to the cardholder.
  • Chargeback fraud occurs when a cardholder receives the merchandise they ordered but fraudulently requests a reversal or refund from the credit card company by claiming they didn’t receive the product they ordered. This reversal of funds is called a chargeback.
  • Friendly fraud is similar to chargeback fraud and occurs when there is no malicious attempt on the cardholder’s part. Forgetfulness, purchases made by a family member without the cardholders’ knowledge, or an inability to identify a purchase on a credit card statement can all cause cardholders to state they never made the transaction in question. Sometimes the cardholder accepts responsibility, but sometimes they are resolute, and if the bank sides with the cardholder, a chargeback is issued.

Now that the distinctions are evident between the three forms of fraudulent chargebacks, let’s explore how each will affect you and its severity.

According to Nerdwallet, regardless of what type of fraud has been committed, the cardholder is rarely held accountable, and liability is usually assumed by the merchant or bank backing the credit card.

In the case of identity theft, the Fair Credit Billing Act, a U.S. Federal law, limits the cardholder’s liability to $50. However, Credit card networks frequently wave that amount as part of their efforts to attract and retain customers.

But what about cases involving fraudulent chargebacks?

Many merchants may not be aware of the following:

  1. According to Nerdwallet, “The bank is more likely to be liable for the fraud for card-present transactions, while the merchant might get stuck with the cost for transactions without a physical card.”
  2. With card-present transactions, the merchant has opportunities to validate the cardholder and physically hand over the merchandise or perform the service, decreasing the potential for fraud.
  3. With online transactions, a card is not present, nor can a merchant verify the buyer’s ID. This increases the risk of chargebacks, both legitimate and fraudulent. Due to the increased risk, many merchant processors will charge higher fees and rates for e-commerce transactions. Age-restricted industries that sell products online, such as the tobacco and cigar industry, face additional risks that can increase the likelihood of chargebacks.

Chargebacks are frustrating enough but have too many of them, and your business could be significantly affected.

So how can chargebacks affect your business?

Here’s what you need to know:

  1. If a chargeback occurs and the issuing bank is not held liable, you will have the funds removed from the account you have connected to your merchant processing.
  2. While you can dispute a chargeback, it will take significant time to gather evidence and complete your dispute. When merchants dispute a chargeback, they lose the majority of the time.
  3. A hold may be placed on your funds. A hold can occur on a single transaction or as a percentage of your total funds processed. Holds on a transaction typically occur if a charge is suspicious or of an unusually high value. A hold on a percentage of the funds you process typically occurs if you’re a retailer that’s at a higher risk of chargebacks and/or you’ve experienced several already.
  4. Your merchant processing account may be frozen. A freeze typically occurs when the processor is determining what actions to take with a merchant account. Those actions may be that they determine you meet the terms of use agreement and the freeze is removed or it could result in adjustments to the agreement to protect the risk factor for the processor. Typical changes to the agreement might include an increase in fees/rates or a requirement to set up a holding account.
  5. Your merchant account could be closed. If your merchant processor determines that you’ve had too many chargebacks and is too much risk for them to keep as a client, they may choose to terminate your merchant processing account. This is a nightmare scenario as your entire business comes to a screeching halt.

Planning is a crucial key to success for any business, don’t neglect to consider your risk of chargebacks and plan accordingly for your merchant processing needs. If you have an e-commerce business or are in an industry considered to be high-risk, it is smart to plan ahead by ensuring you select a merchant processor that you know you can depend on. Do your research to learn which processors are most likely to hold your funds, freeze your account, or worst of all, close your account. It’s better to select the right processor or make a change to a better one before a hold, freeze or account termination occurs. Chargebacks are not fun, but with a little strategy, you can avoid the major headaches that can come with them.

When selecting a merchant processor, there are several things to consider. One important step is to look for a credit card processing company that provides cyber-security (PCI compliance) and offers fraud protection services to help reduce chargebacks. Read reviews and do your research. Make sure you know what features and capabilities you need from your merchant processor prior to your research. You’ll find that each processor has a unique set of solutions and capabilities such as integrations with Point of Sale systems, for e-commerce platforms, QuickBooks, or other software. You might even consider looking to industry associations for recommendations for your industry. If you plan accordingly and do your research, you’ll be able to find a merchant processing solution that’s feature rich, secure, dependable and meets all of your needs.

Another thing to consider is finding an industry-specific merchant processor. For example, Premium Tobacco Payment Processing(PTP) is not only designed to meet the needs of tobacco and cigar industry, they are also the recommended merchant processor by the Premium Cigar Association. PTP is proud to offer the lowest processing rates for the industry, with rates and fees guaranteed never to increase. Backed by Nuvo Merchant Services’ financial power, PTP is a trusted choice for tobacco and cigar merchants looking for secure, dependable payment processing services. If you are a tobacco or cigar retailer looking to set up or change processors, or would like a free audit of your existing processor, call Premium Tobacco Payment Processing at (321) 972-9838.


Source: NerdWallet – Who Pays When Merchants Are Victims of Credit Card Fraud? – July 2020