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What is a Chargeback?

When an individual opens up a debit or credit card dispute regarding a transaction that was not authorized by that individual and gets reversed, it is called a chargeback. It is a primary defense mechanism for customers to reclaim their money if they fall victim to online fraud or unauthorized transactions. There are several instances when a customer can ask for a chargeback, which is not necessary in cases of fraudulent activity. Sometimes a customer may unintentionally buy a product and go for a chargeback immediately.

How do scammers run Chargeback scams?

Scammers are known to intentionally buy a product from an online shop, and once the product is shipped, they will ask for a chargeback. There are instances where scammers will not use their debit or credit cards but instead use the ones whose debit or credit cards are stolen. Sometimes scammers will buy information from the darknet, and through identity theft, they will either use the bank details for a scam or apply for a new account under their bank details. When the true owner of these cards realizes that their cards have been misused, they ask for a chargeback from their banks. Thus, as a merchant, they might lose their product and never recover from it.

What are some common types of chargeback scams?

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.

Tips to avoid a Chargeback scam

As a merchant, here are a few tips that can ensure you do not fall victim to a chargeback scam:

  • Having displayed information such as email address, contact number, and website will encourage customers to directly get in touch with you rather than through their bank.
  • The customer experience and relationship can drastically improve if you offer them a no-hassle return policy, extended refund deadlines, and postage-paid returns.
  • Merchants should offer 24/7 services or reply to the customer at the earliest to resolve their questions and queries quickly instead of asking for a chargeback.
  • By keeping the customer informed when the shipment has been dispatched and also allowing them the option to cancel it if there is a delay in the shipment or the product is back-ordered.
  • They should inform the customer before processing the recurring transaction and should take extra care if it is with a subscription or offers a negative option facility.

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Frequently Asked Questions

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.