Charge back prevention

Article by: Alisdair Faulkner, VP Products
Date: 29 May 2008
Last Update: 30th April 2008

Charge back prevention is an expression used to describe the idea of preventing the need to reverse credit card transactions. Charge backs can be necessary for a variety of reasons, and since some of those are not caused by fraud, but by errors in processing, or the failure of the merchant to supply goods or services, charge backs cannot be completely prevented. It is therefore better to consider charge back prevention to really mean “charge back minimization”.

Charge backs can be costly for the merchant. They usually occur when a consumer files a complaint with their bank or credit card provider. This usually happens when a consumer discovers fraudulent transactions on their statement. The bank will investigate complaints, and will generally take back the value of the original transaction, together with an additional investigation fee directly from the merchants account, unless the merchant can prove the transaction was legitimate. The merchant loses the goods or services sold, the payment, the fees for processing the payment, any currency conversion commissions, and the charge back penalty.

Charge back prevention is the ultimate aim of the fraud scrubbing methodologies used by on-line merchants today. Because of the many unknowns in this process, fraud scrubbing tends to be conservative, in some cases being over-reliant on methods such as IP geolocation, which are often not reliable measures of fraudulent behavior. As a result, many fraud prevention strategies result in the rejection of legitimate business. It may well be that considerably more revenue is lost from spurned customers, than is lost from fraud. In fact, according to Cyber Source, the share of incoming orders merchants declined to accept in 2006 due to suspicion of payment fraud was 4.1%. If only 20% of these turned out to be valid, then as much as US$1.6 billion may have been lost from loss of valid sales. It has been estimated that for every dollar lost to direct fraud, about four dollars worth of valid orders are declined.

Effective charge back prevention therefore depends on effective fraud control. By establishing better identity verification, and by more effective detection of fraudulent transactions through device fingerprinting and device intelligence, merchants can afford to be less conservative in their fraud defense measures and achieve better charge back prevention at the same time.