What is chargeback due to fraud?

Remember the Friends episode when Monica’s credit card was stolen, and some other woman, creatively yet dishonestly spent Monica’s money on her own hobbies?

Hope you like this TV show as I do, as I’m going to refresh your memories.

In my professional life, I see that most of the chargebacks happen due to fraud.

Let’s review one of many scenarios.

Chargeback happens if Monica goes to her bank and says she didn’t pay for this dancing class or for the blouse, or whatever this creative woman used her credit card for. In this case, the dancing teacher will be responsible for Monica’s losses, unless her card had 3ds or other sophisticated authentication methods installed.

In that case, the bank will be responsible for the technology flaw, and a “liability shift” scenario could happen and the bank will have to compensate for Monica’s unforeseen losses.

Why is the dancing class teacher have to compensate for the losses, if there are no 3ds?

Because they didn’t validate the ID of the woman who said she was Monica, therefore considered responsible for the loss.

What are the other ways to protect businesses from chargebacks due to fraud, especially for card-non-present transactions?

Well, if you have an e-commerce website you have many ways to avoid unpleasant situations with the chargebacks.

Often times banks mark stolen cards or figure out other ways to alert the fraud, the payment provider can notify the merchant about this, this is so-called fraud alert.

Unlike the situation with Kevin McCallister from Home Alone 2, when he used his dad’s card, the situation with Monica is different, as the card was stolen and intentionally used for gain.

The situation with Kevin can be classified as a friendly fraud, as the kid didn’t know that using his dad’s card for a luxurious suit in New York Plaza Hotel was considered fraud.

In this case, the merchant had better start putting the confirmation of the transaction happened, as the chargeback will most likely happen.

Another red flag is that someone you don’t know made a large purchase without applying discounts, asking questions, etc.

In this case, I saw people save themselves from extra headaches by asking for the buyer's ID before shipping goods or providing the services.

Another common pattern is to look at the shipping and billing addresses, and if they don’t match merchants should be extra cautious.

If the chargeback happens it will be hard to prove that the merchant shipped goods to Monica, not the other woman, as the person who paid technically didn’t receive goods.