How to combat credit card return fraud
Vaishali Ravi
·May 31, 2024
As ecommerce sales go up, it’s no big surprise that we’re seeing a corresponding increase in fraud: We’ve seen the volume of fraud attempts grow by over 100% between 2019 and 2023.
Fraud can have a real impact on your brand’s bottom line: It’s anticipated that merchants will lose over $362 billion globally to payments fraud within the next five years.
While some types of payment fraud are conducted by seasoned cybercriminals, others are “friendly fraud,” conducted by shoppers who may be exploiting return policies. Both categories come into play as far as one common form of abuse, credit card return fraud, is concerned.
In this article, we’ll look at the different types of credit card return fraud schemes; how payment processors are handling it; and solutions that you can put in place as a merchant to prevent or mitigate credit card return fraud.
What is credit card return fraud?
Credit card return fraud can cover several different forms of return abuse:
- Chargeback fraud
We previously wrote about this form of return abuse in detail. In this situation, a consumer requests a chargeback on their credit card for a product that they purchased, often falsely claiming that the item is missing or damaged, or that they don’t recognize the charge. - Stolen credit card return fraud
In this case, individuals use stolen credit card information to make purchases and then return the items for cash or store credit. This fraudulent activity can result in significant financial losses for both consumers and businesses. - Purchase return fraud
This is the most sophisticated form of card return fraud, and can often be the most damaging. In purchase return fraud, cybercriminals gain access to a merchant’s POS account, and use the stored credentials to process refunds to their own cards, often in the range of $2,000 to $6,000 per transaction. While this scam can be conducted using credit cards, most scammers use gift cards, which they can quickly cash out at a nearby ATM so there is no opportunity to block them from accessing the funds.
How payment processors are addressing credit card return fraud
Credit card companies are well aware of these types of return fraud, and they’re doing their part to put a stop to them—but their efforts may not always mean that you come out ahead.
When a customer requests a chargeback, your store has the opportunity to dispute the refund request through the card provider’s dispute resolution center. You’ll typically need to provide documentation of the transaction, showing that the purchase was made and that the customer received the product. In order to have the chargeback reversed, it’s helpful to have hard evidence, such as photographs of the product before shipping, and signature confirmation of the product receipt. Without thorough documentation, your chances of winning a chargeback dispute are slim.
In situations involving stolen credit cards, the customer is rarely liable for the charges to their account. In fact, under the Fair Credit Billing Act, their liability for unauthorized use of their credit card is limited to $50, though even that limit is typically waived.
On the other hand, in ecommerce sales, merchants are often liable for covering fraudulent charges—and, if the thief has already processed a refund request for the transaction, they may be liable for refunding both the victim of credit card theft as well as the thief.
With respect to POS-related attacks, credit card operators use their own fraud detection teams to identify and respond to attacks, working to alert merchants of POS breaches and identify scam artists so that they can be brought to justice. These teams are responsible for identifying and stopping fraudulent activity as quickly as possible, in order to minimize the impact on customers and prevent further losses. However, in cases where cybercriminals use prepaid debit cards, they may not be able to recover the funds on merchants’ behalfs.
Because credit card companies prioritize consumer rights, they seek to limit customers’ liability in cases involving fraud. That means that merchants may need to develop other strategies to minimize their chances of losing money to a credit card return fraud scam.
What merchants can do to stop credit card return fraud
As we’ve seen, credit card providers will rarely offer your business full protection when it comes to fraudulent charges and returns. That means it’s important to take matters into your own hands by putting strong fraud prevention and detection practices into place.
Here are some strategies to follow:
Document each transaction in detail
When a customer disputes a transaction, it’s important that you can create a solid trail of evidence to demonstrate that the customer isn’t telling the truth. Make sure that you maintain clear documentation of every transaction, including product photos, order confirmations, package tracking updates, carrier tracking status, and signature confirmation. By providing solid documentation, you’ll be more likely to have chargeback cases resolved in your favor.
Use fraud monitoring and detection tools
By embracing third-party fraud alerts and data analytics tools, you’ll be able to recognize suspicious purchasing or return activities in real-time—which means that you can block the transaction, and verify or reject it after further investigation. Identifying suspicious activity early can help you stop scam artists in their tracks, before they can damage your business.
Follow best practices around cybersecurity
Keep your payments data protected with encryption, tokenization, and other tools. Use authentication and verification procedures to ensure that only authorized parties can access your POS data. Ensuring that you’ve followed security protocols for setting up and managing your POS can safeguard your system, and limit your financial and legal liability in the event of a breach.
Use automated workflows to prevent unauthorized returns
In cases of “friendly fraud,” your brand can minimize return abuse by setting up strong workflows for when to accept returns. Using a returns management solution like Loop, you can set conditions that determine whether a product is eligible for return, based on item category, condition, sales events, return reason, and other criteria. With our integration partners, we monitor 3PL data that enables you to assess item condition after it arrives back at your warehouse—and if an item is not in return-eligible condition, you’ll be able to refuse the refund, preventing customers from taking advantage of your policies.
Credit card return fraud is a growing problem for ecommerce merchants, but by being proactive in monitoring and responding to abuse, you’ll be able to protect your profitability.
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