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Minimizing chargebacks by detecting fraudulent orders

Selling your products online gives you access to a much larger customer base, increasing both the amount of orders you receive and the awareness of your brand. While selling online is a great opportunity for your business, it also increases the risk that orders you receive are purchased fraudulently without a cardholder's permission.

To give you an example:

  • A fraudster orders products from your online store using an unauthorized or stolen credit card.
  • You then ship the order to the fraudster.
  • The true owner of the credit card later disputes the transaction with their credit card issuer, forcing you to refund the purchase amount.
  • You’ve now lost the merchandise to a fraudster and the payment to the cardholder.

In order to limit situations like this, it is vital that you learn how to detect fraudulent transactions and refund them. Remember to trust your instincts when reviewing your eCom orders and seek additional help if you are unsure about a new customer or suspicious information. This article provides strategies and tips to help you and includes these topics:

  1. Understanding the cost of implementing a fraud prevention strategy
  2. Investigating orders
  3. Managing eCom orders, shipping and product content
  4. Managing customer communications
  5. Managing payment providers

Understanding the cost of implementing a fraud prevention strategy

As you begin implementing a strategy to identify fraudulent orders and refund them, it is important to remember that there will be a tradeoff between maximizing your revenue and minimizing risk.

For example: In August, your costs due to fraudulent orders is $500. By the end of September the cost of limiting fraud by following your new fraud detection strategy increases to $1000.

In this example, the cost of fraud prevention was higher than the actual cost of fraudulent orders. This is because any fraud prevention strategies you implement, including the ones outlined in this article, may impact your business in the following ways:

  1. You may inadvertently refund genuine orders, since by nature, fraudulent orders are difficult to detect. This can cause a  genuine customer to be less likely to buy again.
  2. Your customers  may have a reduced interest  in purchasing from your online store due to the strategies outlined in Managing eCom orders, shipping and product content.

Therefore, it is important to adjust your fraud prevention strategies on a monthly or quarterly basis.

Investigating orders

Depending on your store, you can check for certain characteristics that may help you identify a fraudulent order:

  1. Check the number of products in the order. Unusually large or high value orders could be fraudulent.
  2. Check the type of products in the order. Depending on your store, you might be wary of orders that are uncommonly purchased together.
  3. Check the billing address of the order. If the billing address is not a real location or not a residential location, it may be a fraudulent order.
  4. Check the shipping address of the order by searching it online. If you discover the address is of a shipping fulfillment center or shipping forwarding business, the order may be fraudulent.
  5. Check to make sure you're not receiving more orders than you're used to in a given timeframe. A fraudster may try placing multiple orders at the same time.
  6. Be wary of customers using multiple cards for large orders. This may be a flag a Fraudster is testing cards and watching to see which card processes successfully vs declines.
  7. If a customer requests an order with urgency and offers to pay you more than what the order was for & requests a wire transfer for the difference. This is likely an overpayment scam where the fraudster may be using a stolen credit card or account to pay you. Never wire transfer funds to a third party.

Managing eCom orders, shipping and product content

You can implement the following strategies in your online store to help identify fraud and limit chargebacks.

  1. Investigate orders that have different billing and shipping addresses. It is a common practice for a fraudster to use the billing address of the card holder and a new shipping address to receive the order.
  2. Delay the shipment of orders by 24-48 hours. This can give cardholders time to identify transactions that are fraudulent and contact you before you ship them.
  3. If the customer asks you to use their own shipping service. This is likely a scam and they then have an opportunity to reroute the delivery to another address.
  4. If you use manual shipping in eCom, increase the price of one- and two-day shipping to be twice or three times it's true value. Fraudsters do not care about the added extra price, so this could be used as an indicator of fraud.
  5. Describe the item you’re selling accurately because if a customer receives an item they didn't expect, they could call their credit card issuer to dispute the transaction.

Managing customer communications

How you communicate with your customers can improve your relationship with them, and as a result limit chargebacks.  If your customers know your online store, you increase the chance they will contact you when they see suspicious activity on their card as opposed to their card issuer. Then you’ll be able hopefully resolve the issue without the the customer having to resort to filing  a chargeback.

  1. Communicate your billing descriptor to your customers. Ensuring your customers can recognize transactions from your eCom store is the first line of defense against chargebacks. Contact or login to your payment provider(s) to identify your billing descriptor.
  2. Encourage your customers to contact you if they have any questions about shipping delivery or sales. Read Creating customer emails to understand how to manage customer notification emails.
  3. Publish your return and shipping policy clearly and include in correspondences and invoices. Read Modifying text pages to learn how to edit your shipping and return policy pages.
  4. Add a live chat app in your shop. Visit our app store in your shop and search Live chat. For more information on our app store, read our help article titled Lightspeed eCom App Store.
  5. Follow up with customers after the order has been delivered to confirm they are satisfied. This gives them an opportunity to address any issues or concerns. Proof of satisfaction can be used to help fight future chargebacks cases. 

Managing payment providers

Obtain positive address verification system (AVS) and card verification value (CVV) matches before shipping. Your payment provider should display the results after checking the AVS and the CVV for each transaction in their merchant portal.

You can also consider adding a phone number or URL in your billing descriptor. A descriptor appears on bills and statements describing the transaction. Chargebacks may be reduced when the cardholder contacts you using the descriptor information. This is instead of cardholders contacting their credit card company which can result in a chargeback.

Contact your payment provider to find out if you can change your descriptor. If you are subscribed to Lightspeed Payments in the United States, our Support team can change your descriptor.

  • For more information about contacting us, click here.
  • For more information about signing up to Lightspeed Payments for American merchants, click here.

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