Generally, there are three categories of chargeback scams. These chargeback scams can be weaker or stronger depending on the fraudulent activity and can be justified from the cardholder's point of view.
Criminal fraud: Victims of identity theft, sensitive bank details being compromised, or physical theft of debit or credit cards ask for a chargeback after discovering an unauthorized transaction on their credit report. Such scams are classified as a strong case of fraud.
Friendly Fraud: Sometimes victims unintentionally purchase a product and ask for a chargeback without concrete justification. If it is found that the chargeback asked was intentional, the customer has committed fraud.
Merchant Fraud: Sometimes a merchant might ask for a chargeback, not realizing that there was a mistake in the purchase or return process. Such scams are classified as a weak case of fraud.Hackers and scammers use several unscrupulous tactics to steal from innocent and gullible victims.
As a merchant, here are a few tips that can ensure you do not fall victim to a chargeback scam:
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Each bank has its unique methodology to assess the risk of a merchant. Additionally, they will also dictate to the merchant to hold certain funds as reserves and expected transaction rates.
As a thumb rule, each merchant is categorized as a high-risk merchant. If merchants are selling luxurious products, then they are viewed as higher-risk merchants. As a result, these merchants are required to hold even higher reserves and higher transaction rates.
The chargeback ratio is the ratio of the number of chargebacks a merchant has acquired to the number of sales in a month. The ratio is calculated by dividing the number of chargebacks by the total number of transactions in a month. Generally, the ratio should be less than 1%. However, exceeding this 1% can designate the merchant as a high-risk merchant.
One of the best ways to avoid falling victim to a chargeback scam is through order review. As the business expands, merchants can find it extremely challenging to order reviews due to high sales volumes. In such cases, merchants can go to a third party for order review. You can also opt for automated services to save time
An on-shore merchant account is when merchants open an account within their home country, while an offshore account is when they open in another country. Merchants with an on-shore account can communicate with their banks easily and quickly compared to those with an off-shore account. While their reach is less, they have less privacy, have a high cost, and have a high tax. Off-shore merchant accounts have more reach and more privacy, with more challenges to communicating with their banks.
