Small businesses have been grappling with a rise in chargeback frauds throughout the pandemic

The pandemic forced many businesses to pivot and shift the way they sell their goods and services to survive, but that also brought with it a new host of challenges 

Financial technology company Moneris is warning small businesses about the increase in chargeback fraud, as the company is investigating over 300,000 cases across the country throughout 2021 and more this year. 

Since the beginning of the pandemic, chargeback frauds have been on the rise, which Yale Holder, vice-president of customer experience at Moneris, says is due to the change in how consumers bought goods.

“When businesses were forced to close or restrict people from entering, they had to shift their business practices to keep afloat,” he said. “That meant doing things like enabling payments on their website, curbside pick-up of goods, and accepting payments over the phone.”

Victims of chargeback fraud

Holder says that anytime a business adjusts its practices, vulnerabilities can be exposed and taken advantage of, especially when it comes to unsuspecting business owners trying to help.

“We saw an increase in manually entered transactions by our merchants,” he says. “This means they were accepting card information over the phone and manually entering it into their point-of-sale system.”

The fact the cardholder can’t be verified and could be a fraudster with stolen card information makes this type of transaction the least secure for a business and comes with the highest overall risk, Holder adds.

Holder points out that the elevation of risk of chargeback fraud is based on the types of transactions a merchant processes.

“A high-risk type of transaction would be mail order or telephone order transactions,” he says. “Where card information is manually entered into the POS system by the business for payment.”

Fighting chargeback fraud

While Moneris investigated 300,000 chargeback frauds during 2021, its data found that only 15% of businesses tried to fight instances of chargeback fraud.

Holder says this might be due to the budget small businesses have to work with, or the time they have available.

“While large businesses may have a budget for legitimate chargebacks and lost goods, the same may not necessarily be true for small businesses,” he says. 

Challenging a chargeback takes time and some effort, which can cause issues for small businesses. 

“Most small businesses have limited resources and it can be tough to find time,” Holder adds. 

Moneris tries to simplify the process for small business owners with online tools, even though it still requires the owners to pull the documents verifying the transaction.

It’s all about education 

Holder wants to educate people on how a chargeback is fought, so they can understand why they’re so under-investigated.

“As a starting point, a chargeback is a payment a cardholder has successfully disputed via their bank to have funds returned to their account,” he explains. 

Afterwards, the bank will get in touch with the card brand, who will reach out to the business that Moneris represents and then the financial company would help them dispute the chargeback. 

“We would ask the business to provide documentation that counters the claim by the cardholder,” Holder says. “Proof of return policy, receipts for the transaction or other documentation as evidence the cardholder did authorize the transaction.”

If a business can provide proof that they followed best practices, the sale follows terms and conditions, and the purchase was authorized by the cardholder, then Holder says the dispute should be declined.

However, if the transaction cannot be verified, the merchant will lose both the money for the product and the product they sold.

Tips for avoiding chargeback frauds

Holder says there are a few simple steps that any business owner can take to protect themself from being a victim of chargeback fraud:

Respond to chargeback disputes immediately;

Require Chip & PIN or tap for in-person payments;

Never accept credit card payments over the phone;

Use fraud prevention tools such as 3DS 2.0 and Kount;

Look for signs of suspicious customer behaviour, such as making large, seemingly random and expensive purchases;

Never leave payment terminals unattended;

Ensure tracking and delivery confirmation of all delivered purchases;

Ensure product and service information and details are communicated for all online store items;

Ensure return, refund, and cancellation policies are clearly stated and acknowledged by the cardholder at the time of sale.