Preventing disputes and fraud

While a customer can’t dispute fully refunded payments, they can dispute partially refunded payments. Card network rules even allow for a payment that was partially refunded to be disputed for the full payment amount. The technological advancements related to online shopping, including digital wallets, NFC and QR Codes, and third-party apps that collect payments for you, have opened up countless new opportunities for fraudsters to obtain your customers’ payment credentials. When they do, it often results in a disputed payment—the fraudster gets the product, the account owner gets refunded, and you, the business owner, are out the product and the money, and also get charged a fee. At DCDial, we know it’s frustrating, so we’re trying to help you deal with fraud the only way you can–by preventing it.

In this section, DCDial provides strategic guidance, risk detection tools, and implementation suggestions to make sure you’re armed with the best defense against fraud. Depending on the service you provide, the goods you sell, or how your business operates, certain methods might be more effective than others

Early fraud detection

Our machine-learning system continuously monitors all payments processed by our users. In rare cases, you might receive a notification from DCDial that we suspect a payment is fraudulent after the card issuer authorizes it. This can occur if we detect subsequent activity on the card that now suggests it’s being used fraudulently.

Although we notify you as soon as we become aware of any suspicious activity, it might be several days after payment is made. Keep in mind that this prediction isn’t a guarantee that a payment is fraudulent—only that we have reason to believe it is.

The system will automatically refund that payment immediately refunding it immediately to proactively prevent a dispute and avoid a dispute fee.

Stolen cards

This type of fraud makes use of stolen credit or card details to make a purchase online. The fraudster may be in possession of a physical card, but it’s more likely that the cardholder’s details were stolen electronically. A business ships goods or provides service to the fraudster, with the assumption that the payment is legitimate.

If a cardholder hasn’t realized yet that their card is lost or stolen (and so hasn’t notified the card issuer), you can still process payments successfully. Even if a payment isn’t declined, this doesn’t mean that it was authorized.

After the cardholder discovers the fraudulent use of their card, they dispute the payment with the card issuer. If the dispute is resolved in favor of the cardholder, the business suffers a loss equal to the amount of the payment, the cost of any goods or services already provided, and an additional dispute fee.

Overpayment fraud

Overpayment fraud (also known as a payout scam) is a variant of stolen card fraud. The fraudster presents themselves as requiring the services of a third-party service in connection with the purchase. The fraudster then offers to pay the seller the cost of the goods, an extra sum for the fraudulent third party, and often an additional convenience (tip) for accommodating the request. The fraud being committed here is that the third-party service doesn’t exist—the fraudster has taken the additional funds while the seller is left with a dispute.

For example, an online antique business may be approached by a fraudster claiming to live overseas. They request that the business use their preferred freight company, whom they ask the business to make payment. Using stolen card information, the fraudster pays the business for the goods and fake freight fees and includes a gratuity for the seller as an incentive.

The business complies and pays the fee to this fake freight company but no shipment ever occurs because there is no legitimate shipper. The actual cardholder discovers the unauthorized payment and disputes it with their card issuer. The payment is automatically refunded and a dispute fee deducted, even though they’ve already paid out funds separately to a fraudulent third party.

Card testing

This is the practice of testing a card (or multiple cards) on one site to see if it’s still valid before using it on another site to make a fraudulent payment. Sites with free text fields, such as donation sites and “pay what you like” e-commerce businesses, are predominately the targets of card testing. Implementing CAPTCHA or rate-limiting charges can help combat this type of fraud.

Alternative refunds

In this form of fraud, the fraudster deliberately pays more than was required, then contacts the business, and claims they accidentally entered the wrong amount. The fraudster requests a partial refund to rectify this, but claims they have closed the card that was used and would like a refund sent using an alternative method that is outside of the card network (for example, check or wire transfer).

For example, a fraudster donates 500 USD to a charity and contacts them shortly after to say that it should have been a 50 USD donation. The fraudster asks for the return of 450 USD using a different method, so no refund is made back to the original card. When the legitimate cardholder disputes the fraudulent payment, the charity isn’t only responsible for the disputed amount, but they have also lost the amount sent using the alternative method.

Never refund payments using a different method than the one originally used. If a card has legitimately been closed, you can still perform a refund. The customer should then contact that card issuer to arrange for the funds to be retrieved.

Marketplace fraud

If you run a marketplace business where your users are responsible for providing service to your customers, this type of fraud occurs when a fraudulent merchant absconds with any payments before providing the services or goods to customers.

For example, a marketplace that connects buyers and sellers can run the risk of a seller taking payment from the buyer and not sending the goods. In such cases, if the funds can’t be recovered from the seller, responsibility for the disputed amount and fee is ultimately on the platform.

Friendly fraud

Friendly fraud—also known as “first-party misuse” or “first-party fraud”—occurs when a legitimate cardholder makes a purchase, but then disputes it at a later date. This can either be accidental because they didn’t recognize the transaction on their statement, or deliberate (for example, due to buyer’s remorse or as an attempt to fraudulently obtain merchandise without paying).

It can be difficult to know whether friendly fraud has occurred, especially in digital sales. For those selling physical goods, shipping to a verified billing address and requiring a signature on delivery can help combat this. In addition, having clear return policies prominently displayed at checkout to which the customer must agree prior to making a purchase can also help.