Last updated on Nov 4, 2024

How do you use fraud prevention tools to lower chargebacks?

Chargebacks are costly and frustrating for any business that accepts electronic payments. They occur when a customer disputes a transaction with their card issuer, often due to fraud, errors, or dissatisfaction. Not only do you lose the revenue and the product or service, but you also face fees, penalties, and damage to your reputation. How can you use fraud prevention tools to lower chargebacks and protect your bottom line? Here are some tips to help you.

1 Verify card details

One of the simplest ways to prevent fraud and chargebacks is to verify the card details of your customers before processing their payments. You can use tools such as Address Verification Service (AVS) and Card Verification Value (CVV) to check that the billing address and the security code match the card information. These tools can help you filter out fraudulent or stolen cards and reduce the risk of unauthorized transactions.

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Chris Del Grande

President & Co-Founder ✔ Father ✔ Entrepreneur ✔ Payments ✔ 2x Inc. 500/5000 List ✔ Helping Small Businesses ✔ Connector
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Preventing fraud and chargebacks is like locking the doors of your shop before leaving—simple yet crucial. One fresh approach is to utilize machine learning algorithms that detect unusual purchasing patterns in real-time, nipping fraud in the bud. Encouraging customers to use secure payment portals with tokenization can add an extra layer of safety. Regularly updating your security protocols is like changing the locks; it keeps the wrong people out. After all, a secure business not only protects profits but also earns customer trust.

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2 Use 3D Secure

Another fraud prevention tool that can lower chargebacks is 3D Secure, which is a protocol that adds an extra layer of authentication to online payments. 3D Secure requires the customer to enter a password, a code, or a biometric factor to confirm their identity and authorize the payment. This way, you can ensure that the customer is the legitimate cardholder and reduce the likelihood of disputes or fraud claims. 3D Secure also shifts the liability for chargebacks from you to the card issuer, which can save you money and hassle.

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3 Communicate with customers

Communication is key to avoid misunderstandings and dissatisfaction that can lead to chargebacks. You should provide clear and accurate information about your products or services, your terms and conditions, your refund policy, and your contact details on your website and your receipts. You should also send confirmation emails, tracking numbers, and delivery notifications to your customers to keep them informed and engaged. If a customer contacts you with a question, a complaint, or a request for a refund, you should respond promptly and politely and try to resolve the issue before it escalates to a chargeback.

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Phillip Kitomari

Legal and Compliance Officer at Pesapal
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I agree that communication is vital especially where there is a chargeback request by a cardholder to a payment service provider. Most merchants do not respond to the chargebacks on time leading to the payment system provider losing the chargeback.

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4 Monitor transactions

Another way to use fraud prevention tools to lower chargebacks is to monitor your transactions and look for any signs of suspicious or unusual activity. You can use tools such as fraud scoring, velocity checks, geolocation, device fingerprinting, and behavioral analytics to analyze your transactions and detect any patterns or anomalies that indicate fraud. For example, you can flag transactions that have a high fraud score, that come from a different country or device than usual, or that exceed a certain amount or frequency. You can then review these transactions and decide whether to accept or decline them.

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5 Use chargeback alerts

Finally, you can use chargeback alerts to lower your chargeback rate and recover some of your lost revenue. Chargeback alerts are notifications that you receive from your payment processor or a third-party service when a customer initiates a dispute with their card issuer. These alerts give you a chance to contact the customer and try to resolve the issue before the chargeback is finalized. You can also use chargeback alerts to refund the customer and avoid the chargeback fees and penalties.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Phillip Kitomari

Legal and Compliance Officer at Pesapal
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In my experience dealing with chargebacks, merchants usually do not collect the required documentation from the cardholders for a successful chargeback defense. But also, acceptance of virtual cards and Cnp's (card not present) should be handled with excessive caution.

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Patty Norris

Specialized Technical Team at Elavon
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I feel that Aquirers need to do a better job at educating SMB merchants on fraud and chargebacks. Most merchants do not have a true understanding of risks and how the chargeback process works; leaving them ill prepared to respond if they receive a dispute. I believe we should do training not just on virtual interfaces and POS devices; but also a conversation on disputes. Knowlege is power; the better educated the merchant they can migate risks and this is beneficial to all parties involved.

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How do you use fraud prevention tools to lower chargebacks?

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1 Verify card details

2 Use 3D Secure

3 Communicate with customers

4 Monitor transactions

5 Use chargeback alerts

6 Here’s what else to consider

Electronic Payments

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