Fraud is a huge risk for merchants and while security technologies and protocols have been improving, serious threats remain. Any merchant who wants to succeed, or better yet, excel, will need to take fraud fighting seriously at both the pre and post-transaction stages. Unfortunately, those businesses that fail to prevent fraud could quickly fall behind the competition and may eventually be pushed out of the market.
Sadly, fraud can have an outsized impact on businesses due to chargebacks. A chargeback occurs when a card-issuing bank claws money from a debit or credit card transaction back, usually because the transaction is allegedly fraudulent. (Sadly, some cardholders abuse chargebacks, filing illegitimate chargebacks to defraud businesses.) Chargebacks can result in lost revenues and inventory, chargeback fees, and a rising chargeback ratio.
As in medicine, an ounce of prevention is worth a pound of cure when it comes to fraud and chargebacks. That’s why we’re going to take a look at pre and post-transaction fraud prevention.
Pre-Transaction Fraud Prevention
It’s best to shut down a fraudulent transaction before it’s authorized. While there are steps you can take after the transaction is authorized, you may still end up paying various fees, and risk losing labor and inventory. If you can prevent the transaction from being authorized in the first place, you may be able to eliminate or at least reduce penalties.
There are now a variety of pre-transaction tools that you can use to sniff out potentially fraudulent transactions.
Some popular pre-transaction fraud prevention tools include:
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Address Verification Services- Double-check shipping addresses.
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Strong Customer Authentication- A customer is required to provide a second form of ID to the card-issuing bank.
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Two-Factor Authentication- A customer needs to provide a second piece of ID to the merchant.
Let’s take a closer look at these pre-transaction chargeback and fraud prevention tools.
Address Verification Services Explained
You can use an Address Verification Service (AVS) to check to ensure that a shipping address matches an address associated with the cardholder. If not, you may want to pause the transaction to confirm with the cardholder that it’s a legitimate purchase. It’s possible that someone stole their credit card or card data.
Strong Customer Authentication Explained
Another option is to require banks to ask for a second form of ID when someone is making a transaction (online or in-person). With 3D Secure, for example, the card issuing bank can ask the person making the transaction to provide a password, Personal Identification Number (PIN), or other bit of information.
This is sometimes referred to as Strong Customer Authentication (SCA). The European Union now requires Strong Customer Authentication for both online and in-person transactions. Even if you’re outside of the EU’s authority, it’s still wise to ask for a second form of ID as doing so can prevent fraud and chargebacks.
Two-Factor Authentication Explained
Online merchants can also take steps to help customers secure their online accounts. Account takeover fraud is one of the most common ways fraudsters perpetrate fraud. Essentially, the fraudster will gain access to a customer’s account and then use saved payment information to make an unauthorized purchase. Later, the merchant could get hit with a chargeback, resulting in fees and penalties.
You can ask customers trying to log into a portal to provide a second form of ID, such as a code texted to their phone. Doing so means a potential fraudster would need to have access not only to the customer’s online account, but also their phone. This is called Two-Factor Authentication (2FA) and works similarly to SCA, but merchants, rather than banks, can set up the authentication process.
Post-Transaction Fraud Prevention
Unfortunately, it’s not always possible to prevent fraud before a transaction is authorized or processed. There are a variety of steps merchants can take, however, to shut down a transaction after it’s authorized, as covered below.
Ideally, a merchant will still stop fraud before products are shipped or services rendered, even if payment has been authorized. This can protect inventory and reduce the labor power wasted on a fraudulent transaction. Some fees and costs may still accrue, however.
Some popular post-transaction fraud prevention measures include:
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Chargeback alerts- Warn you of pending chargebacks, thus allowing you to potentially prevent chargeback fees and other penalties.
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Transaction data analysis- Carefully reviewing transaction data to spot concerning patterns and red flags.
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Post-Authorization chargeback management- Combating chargebacks through representment and other steps.
Let’s take a closer look at these individual post-authorization chargeback and fraud prevention measures.
Chargeback Alerts
Chargeback alerts can’t necessarily prevent fraud but they can prevent chargebacks. Given that chargebacks result in hefty fees and a rising chargeback ratio, among other things, it’s certainly worth a merchant’s time to head them off. A chargeback alert will let you know about a pending chargeback and will provide you with an opportunity to resolve the issue before a chargeback is officially filed.
Unfortunately, this often means providing a refund to the cardholder. If the chargeback was clearly the result of something like a stolen credit card, it’s often best to simply provide a refund. The merchant will lose revenues, but will prevent chargeback fees and will also keep their chargeback ratio lower. The latter is especially important because a rising chargeback ratio can result in increased processing fees on all of a merchant’s transactions, including those that don’t result in chargebacks.
Transaction Data Analysis
As you conduct transactions, you’ll generate data. You can study this data to find patterns and red flags. For example, you might notice that a certain IP address or shipping address is responsible for a disproportionate amount of chargebacks. If so, you may want to block transactions from such addresses.
You can also observe customer behavior. If you have a customer who buys a few products worth less than $100 every month suddenly trying to purchase $1,000 worth of gift cards, that’s a suspicious transaction, and one worth pausing to confirm with the cardholder with a follow-up email or other message.
There are many other things you can analyze by looking at data. While doing so can be time-consuming, it’s one of the best methods for chargeback and fraud prevention.
Post-Authorization Chargeback Management
Sadly, not all fraud can be outright prevented. The same is true for chargebacks. If you fight chargebacks through the representment process, however, you can win disputes. Doing so will allow you to regain revenue that you stood to lose because of the chargeback. This can be a major boon for your bottom line.
Unfortunately, managing the chargeback representment process can be time-consuming and if you miss key deadlines, you’ll lose the dispute. The right chargeback and dispute management platforms, like ChargebackHelp, make it easier to gather paperwork and data, and also, track upcoming deadlines. This way, you can put forward your best efforts fighting chargebacks while also reducing the amount of resources spent managing and fighting them.
If you need assistance with chargebacks, reach out to our team. We’ve helped countless merchants dramatically reduce the number of chargebacks they’re hit with. We can also offer suggestions for fighting pre and post-authorization fraud in general.