Did you know that 81% of cardholders have filed a chargeback? While many are legitimate, a significant portion is fraudulent, costing businesses $40 billion annually.
Globally, fraudsters use chargebacks as the perfect disguise for illegal refunds. In one survey, 23% of respondents admitted to engaging in chargeback fraud when they filed a dispute over a charge.
This alarming statistic underscores the need for businesses to take proactive measures to combat chargeback fraud, and one way to do so is through identity verification.
How Does Chargeback Fraud Happen?
To request a chargeback, a customer can claim they didn’t receive the product or that it did not satisfy their expectations. Many others claim they didn’t authorize the transaction.
So, When does Fraud Occur?
Sometimes, customers are honest about these claims, but many times they are not.
In these cases, they authorized the transaction and obtained the product satisfactorily, but they intend to keep both the product and their money.
What is the Chargeback Process?
- The cardholder contacts their bank to initiate a chargeback.
- The card issuer places a hold on the disputed funds and investigates.
- The merchant must provide compelling evidence to overturn the chargeback, which can be difficult, especially when dealing with friendly fraud.
Friendly fraud often stems from buyer’s remorse, price inflation disputes, or simple misunderstandings. However, it’s a deliberate attempt to deceive and exploit the chargeback system. It’s a battle most businesses lose.
What does Identity Verification have to do with Chargeback Fraud?
In 2023, Ayden reported that the retail sector alone lost $429 billion to payments fraud. Yet
only two-thirds of businesses (64%) have effective fraud prevention systems.
Many businesses, especially SMEs, do not know who their customers are. Identity verification confirms an individual’s identity and identifies potential red flags or risks that could indicate fraudulent activity, including chargebacks.
For example, a company may conduct background checks on their vendors to assess their compliance with fraud prevention standards. If the vendor has a poor track record, the company can seek alternative partners, reducing its exposure to chargeback fraud.
Identity and background checks are also particularly effective in cases where individuals use stolen identities to make unauthorized purchases. Businesses can stop fraudsters by asking them to provide government-issued ID or pass a live video test before they approve a purchase.
In 2023, Safaricom reported that its fraud prevention measures, including background checks, reduced fraudulent transactions on its mobile money platform, M-Pesa.
In legitimate disputes, background checks can also provide evidence to support a business’s position. For example, a company could verify a customer’s address to determine the validity of their claim that a product wasn’t delivered. This also includes conducting criminal checks on potential employees to ensure you don’t hire fraudulent individuals who could endorse chargebacks internally.
Get The Protection You Need From Chargeback Fraud
Seamfix provides comprehensive background checks and identity verification solutions, including address verification, credential verification, biometric verification, document verification, and criminal checks.
That’s not all!
- Detect red flags in customer data, so you can prevent fraudulent transactions.
- Make background checks efficient and easy to integrate into your existing workflows.
- Comply to strict data privacy regulations to protect customer information.
Book a call today for a free consultation to discuss your specific needs. Our team of experts is waiting to assist you.
