Ecommerce Fraud Prevention: 15 Best Practices To Minimize Chargebacks

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For consumers, chargebacks are often a last-ditch effort to recover money when a merchant fails to deliver a product, delivers a shoddy product, or entirely misrepresents a product. However, as many e-commerce merchants know all too well, there are a number of situations in which dishonest customers or customers who express buyer’s remorse will abuse a chargeback protection to bypass you, keep the product, and even hang onto the reversed charges.

Chargebacks due to fraud or abuse can cost your company thousands of dollars in lost merchandise per claim, administrative fees, lost revenues, and countless hours of wasted time chasing claims.

Payment providers such as Square, Amazon Pay, Shopify, Stripe, or credit card companies will often place the burden of proof on the merchant. These platforms often side with the customer (whom they have an existing relationship with), rather than the merchants, whom they’ll gladly charge $10-25 in administrative fees per dispute, regardless of whether the outcome is in the merchant’s favor.

According to several consumer reports, 70% of merchants said chargebacks rose during the pandemic, with only about 12% of merchants successful in disputing chargebacks. In fact, chargebacks are a growing problem, with online payment fraud growing at 17.3% CAGR and costing merchants $41 billion USD in 2022 alone.

Regardless of your business’s scale, chargebacks cost you money and time, and they are a reflection of your business’s quality. To anticipate and prevent chargebacks, both friendly and fraudulent, there are a number of money-saving steps you can take as a merchant that don’t always involve confrontation.

Below, we go over 15 best practices to avoid chargebacks.

15 Ecommerce Fraud Prevention Best Practices

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1. Document early and often

The best fraud remedy is prevention. When you receive a chargeback notice from a payment platform, you’re often given just a few days to respond with evidence such as proof of customer authorization, evidence of service provided, proof of delivery, and a refund policy and/or terms of service.

Always make sure you have a system in place to document these items systematically, as well as any communication with the customer, especially when processing high-volume orders.

2. Use delivery confirmation when possible

If you ship physical goods, always keep proof of shipment and use delivery confirmation (signature required) when possible, especially for high-value items. Among the most common reasons for chargebacks is the customer claiming they never received the order.

3. Be transparent with your billing name

If using a different DBA or LLC name, for example, remind your customers of what the charge will appear as on their credit card statements when sending out receipts. Not being able to associate a business name and the products paid for is another top reason for chargebacks.

4. Articulate your terms of service, warranty, privacy, and refund policies clearly

Make sure to spend time thinking through these common policies and articulate them clearly on your store page, especially if you sell to Europe, which makes items like privacy policies legally required. It’ll also give you written documentation to lean back on when communicating with customers about chargebacks. Consider supplementing your refund and shipping policies with an FAQ for frequent disputes, or highlight areas commonly misunderstood.  

5. Convey transparency in your product descriptions

This is another preventative step, as “items not as described” is another common chargeback reason. Be as explicit and clear as possible about your product’s sizing, quality, pictures, colors, delivery times, and packaging on your website. For example, when describing bold colors, use more descriptive terms like “neon green” or “mustard yellow.”

We also recommend including product dimensions in as much detail as possible in both centimeters and inches if selling globally. This will help customers avoid issues like “it didn’t fit” or “it was the wrong color.”

6. Make use of your platform’s fraud indicators

Platforms such as Amazon and Shopify will offer sophisticated built-in fraud detection algorithms to help online retailers flag and identify fraudulent orders. For example, Shopify will rank each customer’s order for you on a risk scale, from low to high. For customer orders flagged as high risk, Shopify offers a number of useful recommendations, which we’ve included and supplemented in this article.

7. Verify the customer’s IP address

For high-value orders, check to see if the customer’s IP is suspicious. IPs coming from an unusual overseas location not matching the billing/shipping addresses (coupled with a few other fraud factors) are potential signs of fraud.

8. Google emails, phone numbers, and addresses for existing fraud

It’s no surprise that Google can be incredibly helpful, as common emails, phone numbers, and addresses associated with fraud are often reported online and thoroughly documented in common fraud attempts.

For example, scammers often pose as more legitimate customers such as Universities or other businesses, and a quick Google search may reveal that the address used for receiving goods is actually a virtual office, PO box, or freight forwarding service, which legitimate customers are less likely to use.

9. Check to see if billing address matches shipping address

Mismatches often indicate risk, but could also be gifts for distant loved ones. Again, this is one of many factors, which when taken together, could indicate higher chances of fraud.

10. Consider delaying shipping by 24 hours on first-time, high-value items

Scammers want high-value products shipped fast before stolen credit cards are detected. Cards reported as stolen will usefully be frozen immediately, and it may take someone a day or more to realize their cards have been stolen. Be on the lookout for high-value orders from first-time customers who opt for unusually fast, third party, or expedited delivery – another common sign of fraud.

11. Limit the maximum number of orders and take big orders by phone or chat

Again, scammers love to get their hands on as much product and money as possible. Someone ordering 20 drones or 200 doggie leashes from you is unlikely to be for individual use. Try to determine what a reasonable per person threshold is for orders deemed suspicious. Large corporate orders are better done on the phone, or consider implementing a chat feature to discuss and vet larger orders.

12. Use a block list

If you detect constant abuse coming from a customer, consider putting that customer or IP address on a blocklist and avoid future headaches. Contact the customer to verify if the order is suspicious; fraudsters will often use fake phone numbers or stumble when asked for basic details about the order.

13. Use fraud prevention software

Sometimes, if your order volumes are high, it’s nearly impossible to manually verify orders. There are a number of software solutions you can use to aid in detecting and avoiding fraud.

  • Software such as Amazon Fraud Detector or Riskified, employ machine learning models trained on millions of cases to detect fraud. The type of software you use often depends on your preference, integration needs, and industry.
  • Shopify offers a number of APIs and apps that filter and detect fraud that can be integrated into your existing Shopify shop.
  • Companies such as Paypal offer basic fraud tools that give merchants the option to determine their fraud threshold when it comes to items like Address Verification Services (AVS) and Card Verification Values (CVV).
  • Companies like Stripe also allow you to employ 3D Secure services, which require customers to log into their credit card company or banking website (as another layer of protection) in order to authorize the transaction. 
  • Companies like Digital Element, offer sophisticated IP verification tools which is often a first line of defense.

14. Employ due diligence and take action

Ultimately, the due diligence and final decision to act is incumbent upon the merchant. Don’t be afraid to refund or verify high-value orders that light up the fraud indicators above, as legitimate customers won’t generally be annoyed with a friendly just-to-check call. It’s also far cheaper to refund a likely fraudulent order than to chase down thousands of dollars in impossible to recover products lost due to fraud.

Even though you may lose the sale and alienate a customer, you’ll end up losing more money, your precious time, as well as the products themselves to fraud if you aren’t proactive in taking action. Remember, most police jurisdictions will not bother to investigate online fraud.

15. Understand why chargebacks occur

To protect your time and energy, recognize that chargebacks are sometimes legitimately used by consumers. There are also gray areas. Buyer’s remorse is a common reason for chargebacks, especially when customers do not want to bother with a refund policy. You can make this fair to you by stating a restocking fee.

Mistakes also happen. Sometimes chargebacks may occur because customers fail to recognize the charges or forgot they purchased the items. Customers may also misunderstand delivery dates or have different expectations, and unintentionally believe they are being scammed. When investigating chargeback claims, you can refer to this page for reason codes for various payment providers, should you wish to fight the claims.

Final Thoughts

Lastly, it’s outside of your control if the customer still chooses to bypass you and initiate a chargeback. Don’t take things too personally. Understand where your customer service may need improvement, as customers who fail to get adequate responses from the merchant in addressing their complaints will resort to using chargebacks.

This is your chance to communicate with the buyer and address any potential concerns and keep a happy customer who may return. In cases of clear chargeback abuse and fraud, don’t be afraid to use tools, offer evidence, communicate, and move on quickly to focus on the important aspects of your business.

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