How to Detect Fraud Before It Becomes a Chargeback
By Chris Alarie on Sep 10, 2020
When it comes to managing chargeback fraud, merchants would be well served to remember the old idiom: An ounce of prevention is worth a pound of cure. Simply put, the most effective way to protect your business from fraud is to detect and prevent that fraud before it becomes a chargeback.
Stopping instances of fraud before they become chargebacks involves understanding the different kinds of fraud, being aware of the warning signs of fraud, and knowing what to do in fraud cases. This article will explain these essential elements of fraud prevention and offer potential solutions that merchants can use to protect their businesses.
Types of Fraud
True Fraud is when a credit card is stolen and used to make a purchase. True fraud usually results in the customer reporting the fraud to their bank, the bank closing the account, and the bank issuing a new card to the customer.
Friendly Fraud is when a customer mistakenly disputes a charge for a relatively innocuous reason, such as a family member making a purchase without the customer realizing, the customer genuinely forgetting that they had made a purchase, or some mistake relating to the customer not understanding something such as a return policy. The key distinction is that the customer is not knowingly, intentionally committing fraud.
Chargeback Fraud is when a customer requests a chargeback knowing that they have no valid claim to one. While friendly fraud results from an honest mistake, chargeback fraud is an intentional misuse of consumer protection mechanisms to get something for free. It is often used as a form of digital shoplifting.
Warning Signs of Fraud
To prevent fraud, you must be able to identify it. While the variety and nuance of different instances of fraud—not to mention the deviousness of intentional fraudsters—makes it difficult to detect fraud, there are significant indicators that you can monitor.
These warning signs of fraud can take many forms. Conspicuously large orders from first-time customers or a series of small transactions from the same account could be indicators of fraud. Another possible warning sign could be a series of purchases from one account that go to different shipping addresses or a series of purchases from different accounts that go to a single shipping address. Similarly, multiple orders from different card numbers that originate from a single IP address are a cause for suspicion, as are a series of failed transactions from a single IP address.
Some countries are known to generate a lot of fraud, so geographic indicators can be useful in detecting potential fraud. Unusual uses of international shipping addresses or orders originating from IP addresses in red flag regions such as Russia, Ghana, or Malaysia are also suspicious. Related indicators of fraud would be IP addresses and shipping addresses that don’t match one another or cloaked IP addresses.
Inconsistent or unusual order data could also potentially indicate fraud. This unusual data includes orders with obviously fake contact information (i.e., “555-555-5555”, “123 Main St.”, “Email@email.com”, etc.) or multiple orders from the same account with inconsistent contact information.
An order that attempts to overcharge a credit card and pay out to a third party by a different payment method is an exceptionally strong indicator of fraud.
These warning signs do not always mean that a transaction is fraudulent, but they are still frequently used tactics by individuals who commit fraud. If you can identify these indicators, it will be easier to prevent fraudulent transactions before they cause problems for you.
What to Do in Cases of Fraud
Merchants need fraud solutions that allow them to combat the numerous, ever-changing fraud risks elegantly without compromising sales or requiring cumbersome IT integrations.
Our platform offers you real-time visibility into what’s going on with your chargeback activity and helps you identify patterns of fraudulent behavior.
MidMetrics is expertly designed to be easy to use, and it requires minimal IT effort for merchants to implement. It integrates with payment processors, gateways, CRMs, and service providers via API, and uses secure credentials to establish direct connections with card networks and banks.
Want to see MidMetrics in action? Schedule a demo with us.
A solid chargeback protection plan is essential, but what is a good chargeback protection? What components does it need to have, and how can you tell if they’re working effectively? We’ve got answers for you in this helpful guide, How to Protect Your Business Against Chargebacks & Fraud.