How to prevent chargeback fraud
In the payments world, chargebacks are inevitable. Find out why they occur and how to reduce chargeback fraud.
When building a product or service that includes card capabilities, it is nearly inevitable that you will eventually encounter chargebacks. Recognizing how they occur and what they say about your merchants and cardholders can help you reduce this source of frustration and combat fraudulent activity.
What is chargeback fraud?
A chargeback is a card payment that has been processed and subsequently disputed by the cardholder. Chargebacks help protect the consumer when a bad actor steals debit or credit card information. However, chargeback fraud is a malicious use of these protections, and the practice is rising.
There are three types of chargebacks:
Friendly fraud
This is a type of fraud in which the cardholder files a dispute with the card company without any justification for doing so. The customer may not even realize they are committing fraud.
An example would be a consumer who forgets to turn off an automatic subscription and regrets agreeing to the charge. The chargeback may arise from a truly dissatisfied customer who feels they have no other solution or from one who knows better but just wants something for free.
Merchant error chargebacks
When a customer can’t or won’t reach a resolution directly with a merchant for issues with a purchase, they may turn to the credit card company for help and dispute the charge. In this type of chargeback, it’s the merchant’s fault.
Merchant error chargebacks occur for reasons such as:
- Being charged the wrong amount for a purchase
- Not receiving a purchased item
- Getting the item in poor condition
- Not being properly refunded for a returned item
This category of chargebacks may not be motivated by malice and could be due entirely to a business’s lack of good customer service protocols.
Criminal fraud chargebacks
When a criminal steals a credit or debit card number and uses it to make purchases, the card owner will likely seek their money back for those purchases once the fraud has been discovered. They can reach out to the retailer to have this issue resolved directly but may prefer to utilize the “zero liability” fraud protection offered by their card company.
When customers contact the card company to report unauthorized use, the company typically freezes the card, issues a new one, and refunds the amount of the fraud charges. The bank or lender may absorb the cost. If they don’t (and they pass it on to the retailer), it appears as a chargeback for the retailer.
Common chargeback reason codes
To prevent chargebacks, you have to know what’s causing them. Each time a chargeback occurs, the merchant receives an alphanumeric code that represents the reason the chargeback was granted. This code provides a basic explanation of the claims the cardholder made to their bank when they disputed the transaction.
All of the major card networks (Visa, Mastercard, Discover, and American Express) use reason codes, but they each have their own descriptions and numbering systems. Below are the chargeback reason codes for Visa and Mastercard.
Visa chargeback reason codes
| Exception Code | Exception Description |
| 10.1 | EMV Liability Shift Counterfeit Fraud |
| 10.2 | EMV Liability Shift Non-Counterfeit Fraud |
| 10.3 | Other Fraud – Card-Present Environment |
| 10.4 | Other Fraud – Card-Absent Environment |
| 10.5 | Visa Fraud Monitoring Program |
| 11.1 | Card Recovery Bulletin |
| 11.2 | Declined Authorization |
| 11.3 | No Authorization |
| 12.1 | Late Presentment |
| 12.2 | Incorrect Transaction Code |
| 12.3 | Incorrect Currency |
| 12.4 | Incorrect Account Number |
| 12.5 | Incorrect Amount |
| 12.6.1 | Duplicate Processing |
| 12.6.2 | Paid by Other Means |
| 12.7 | Invalid Data |
| 13.1 | Merchandise/Services Not Received |
| 13.2 | Cancelled Recurring Transaction |
| 13.3 | Not as Described or Defective Merchandise/Services |
| 13.4 | Counterfeit Merchandise |
| 13.5 | Misrepresentation |
| 13.6 | Credit Not Processed |
| 13.7 | Cancelled Merchandise/Services |
| 13.8 | Original Credit Transaction Not Accepted |
| 13.9 | Non-Receipt of Cash or Load Transaction Value |
Mastercard chargeback reason codes
| Exception Code | Exception Description |
| 4515 | Cardholder Denies Transaction Finalized |
| 4807 | Warning Bulletin File |
| 4808 | Requested/Required Authorization Not Obtained |
| 4812 | Account Number Not on File |
| 4831 | Disputed Amount |
| 4834 | Duplicate Transaction |
| 4837 | No Cardholder Authorization |
| 4841 | Cancelled Recurring Transaction |
| 4842 | Late Presentment |
| 4846 | Correct Transaction Currency Code Not Provided |
| 4849 | Questionable Merchant Activity |
| 4853 | Cardholder Dispute: Defective/Not as Described |
| 4854 | Cardholder Dispute: Not Elsewhere Classified (U.S. Region Only) |
| 4855 | Goods or Services Not Delivered |
| 4859 | Services Not Rendered |
| 4860 | Credit Not Received |
| 4863 | Cardholder does Not Recognize: Potential Fraud |
| 4870 | Chip Liability Shift |
| 4871 | Chip/Pin Liability Shift |
| 4999 | Domestic Chargeback Dispute (Europe Region Only) |
The cost of chargebacks
Even the most sophisticated card programs will experience chargebacks, and it’s not possible to eliminate them completely. However, they can significantly affect a card program’s bottom line, as chargebacks cost time in lost fees, time, and human resources to handle.
Chargebacks also affect retailers and can be blamed for some of the increased business costs today. Consider that friendly fraud costs an average of $35 per $100 in disputes. With friendly fraud reported by 33% of merchants, this demonstrates a significant liability for companies.
How to mitigate non-criminal chargebacks
Companies can reduce chargeback fraud and improve their bottom lines by taking the cost of chargebacks seriously. Not only do chargebacks hurt from a financial perspective, but too many can jeopardize the relationship between the card processor or network, which has strict limits on how many chargebacks are allowed.
How to reduce friendly fraud
Educate the consumer. Explain how the product or service works ahead of time to reduce misunderstandings and set realistic expectations. Make advertising an honest representation of your offerings and payment schedules.
Give great customer service. Provide self-service help materials so customers can solve problems, feel good about their purchases, and be more inclined to keep them. Make it easy for them to reach a live person and resolve issues early on.
Send recurring billing reminders. To reduce billing surprises, let customers know when their renewal period is approaching and provide easy cancellation options. Explain how service terms and charges work so they can accept the billing agreement with a full understanding of what they are buying.
How to reduce merchant error chargebacks
Lowering these types of chargebacks may not be easy, but giving your customer more options can help. What is the first thing your customer will do when a mistake happens? If they feel it’s easier to interact with the credit or debit card company than you, that’s the first issue to resolve. Improve your customer service and make it simple for customers to dispute charges with you directly.
Ways to reduce criminal chargeback fraud
It’s critical that your team monitors the activity and transaction behavior of every user across time and that your business establishes benchmarks for good user patterns and bad user patterns. Below are some highly recommended measures your team can take to reduce chargebacks:
Use fraud prevention tools like Astra
Astra has advanced security controls that significantly reduce fraud by 100x to 1000x better than legacy vendors. These technologies monitor transactions and get real-time updates on user activity, location, and intents. Find patterns in data to help flag chargeback fraud before it gets out of control, such as seeing a large influx of charges from a single website or social platform (which may signal a coordinated effort among a group of individuals to defraud.)
If a user repeatedly deposits funds only to transfer them to products like Venmo or CashApp immediately, you may have a fraudulent user who is exploiting your services and potentially laundering money.
Verify information
Use technology that checks the customer’s billing address against the one on file with the card issuer. Confirm additional information when available, such as phone number or exact name (including Mr., Mrs., middle initial, etc.)
Authenticate logins
Two-factor authentication requires users to log in securely and verify with an additional method, such as a code sent by SMS/text or email. Use this, at a minimum, and consider adding biometric authentication. It enhances login and account security through facial recognition or fingerprint authentication.
Watch for cash transactions
Implement your own velocity and volume limits. For outbound transfers, implement a duration of days for which funds must remain in your account so users can’t immediately transfer funds out. Also, consider implementing a high fee for any outbound transfer.
Monitor transactions and obtain Merchant IDs if possible. Users repeatedly depositing funds and immediately transferring them to CashApp may be engaging in fraudulent behavior.
Implement risk scoring & user control
Risk scoring uses data analysis to place users and their transactions into categories based on bad, okay, good, or great; use these to assess activity or shut off access when needed.
An example would be limiting who can transfer to Cash App until they have shown a pattern of healthy activity.
Educate on the risks
Learn about the latest fraud trends and how you will be updated on new developments as they happen (tech partner, news, legal counsel). Train staff on fraud prevention to stay alert to these new trends and know what they should do to report suspected fraud early and often.
Practice good security hygiene
Maintain secure systems by regularly updating software and keeping hardware working properly; only outsource tech or finance functions to trusted partners with a track record of keeping data safe.
How Astra helps mitigate chargeback fraud
Astra’s unique monitoring and qualification technology helps you see how cardholder activity contributes to chargebacks – whether fraud-related or not.
Two notable advancements that make this happen include our Webhooks, which track and monitor how users behave and the transfer activity attributed to them.
Instead of waiting days to learn that a user has been suspended, Webhooks notifies you in real-time so you can freeze the user’s card and prevent further risk. You’ll also learn about chargebacks as they happen and why they happen, giving you a better view of trends affecting your merchants and cardholder accounts.
The Astra Dashboard acts as your all-in-one command station for logging, monitoring, and accessing Users, User Intents, Transfers, Routines, and Chargebacks.
These tools, along with having your own direct integration with an identity provider, offer you optimal control over who gets a virtual card and whether they can continue to use it.
Ready to put yourself in the driver’s seat and reduce chargebacks (and their high cost) for good? Contact us for a full demo.