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How to Navigate Prepaid Card Chargebacks

The convenience of a prepaid credit card has increased in popularity, but so has the chargebacks. They’re ideal for gift giving and increasing purchase options among those without regular credit cards. While prepaid cards open the doors to a large segment of unbanked customers, for merchants they also introduce a higher risk of fraudulent chargebacks. Fraudsters have become creative with the use of prepaid cards and have used chargebacks to get more money and products.

Merchants have seen an increase in “friendly fraud,” or customers making chargebacks, in order to receive free goods. According to Businesswire, 80% of merchants reported experiencing an increase in chargebacks over the past three years. About 68% have seen an increase in friendly fraud charges since the pandemic hit.

Here are the things that merchants must know about accepting prepaid cards and handling chargebacks.

What Are Chargebacks?

A chargeback is when a consumer makes a purchase with a credit card, disputes that payment, and submits it to the bank for reversal. Chargebacks can be legitimate when customers don’t like the product or it wasn’t what they ordered. However, sometimes a chargeback is fraudulent. Some cardholders will request a chargeback using stolen cards or making faulty claims about not receiving the product. The decision on whether to reverse the payment rests with the issuing bank.

The bank will review the transaction and decide to side with the consumer or the merchant. When the bank sides with the consumer, the payment is refunded. The merchant loses the money from the transaction and gets slapped with an additional fee. Multiple chargebacks financially devastate merchants — regardless of whether the chargebacks are legitimate or fraudulent.

Chargebacks can occur for many reasons, but the following five are the most common causes:

  • The product did not arrive.
  • A person used a stolen card to purchase the products.
  • The merchant shipped the wrong product.
  • A clerical error occurred during billing.
  • The company did not perform the service.

Can You Have Chargebacks on Prepaid Cards?

The dispute and chargeback rules that are laid out by the Fair Credit Billing Act do not cover prepaid cards. This means that the United States Federal government doesn’t require banks to offer chargebacks on prepaid cards. Major credit card networks like Visa and Mastercard have a vested interest in maintaining customer confidence in their prepaid cards, so they offer fraud protection along with the prepaid cards.

Visa covers their prepaid cards with a Zero Liability program as long as the cardholder reports the card as lost or stolen first. The cardholders must bring disputes to the prepaid card issuer who has their own forms for handling transaction disputes. While Mastercard mandates cardholders register their cards prior to filing a dispute claim, and will send cardholders to the issuer if a specific dispute comes up, that isn’t covered under the general policy.

Since Mastercard and Visa offer cardholder protections, chargebacks may hit merchants who sell prepaid cards when a fraudster buys those cards to launder money. The cardholder will dispute the transaction that was used to make the prepaid card purchase, and then the merchant is left with a truly fraudulent chargeback.

The Fraudulent Use of Prepaid Cards

Prepaid cards don’t require the user to provide identification, which makes it easy for fraudsters to use them to launder money. They purchase a prepaid card with stolen funds and then use them to make any purchase they like without it being traced. Fraudsters have used these cards in drug trafficking operations, and in preparation for terrorist attacks. The most common criminal use of prepaid cards is simple financial fraud.

There is a rise in the instances of hackers compromising the prepaid card systems databases, especially when issuers have outsourced prepaid card management to third-party processors. Hackers can copy card numbers and inflate balances and withdrawal limits. Since prepaid cards are so easy to purchase and use without identification and credit history, they don’t have the same kinds of associated cardholder information attached to them which makes it possible to detect and filter out traditional forms of payment card fraud.

Fraudsters steal activated physical gift cards and use them to purchase items. They may pose as a payment processor and call the company to keep loading the card so they can use an ATM to offload free money. They also use prepaid cards in tax fraud. There are many states and the federal government that allow refunds to go to prepaid cards. Some criminals steal identities and then complete the tax forms and direct the funds to the cards.

Identifying Potential Chargebacks

Merchants need to be mindful of payment fraud using prepaid cards in order to prevent prepaid card chargebacks. It is important to analyze previous prepaid transactions and determine whether those transactions have resulted in disputes. If the number of prepaid disputes is low, there is no need to worry. Treat those transactions as any other.

Monitoring your account can be very time-consuming if you try to do it on your own. Your payment processor can provide you with alerts when there is a potential for fraudulent chargebacks. This can reduce the time that you spend analyzing each transaction as the software will do it for you. If the amount of prepaid transactions results in high dispute numbers or substantial fraud loss, tighten up the front-end fraud filters when a customer uses a prepaid card.

Protecting Your Business From Prepaid Card Chargebacks

Merchants risk having chargebacks that could damage their business every time they approve a sale online. Automated intelligence tools can help you forecast, prevent, and combat charges by analyzing thousands of data points about each customer including their ticket size and timing.

LOLA POS has partnered with Fraud Wrangler which has developed software trained on millions of orders. It assigns a likelihood percentage to each order for whether it will become a chargeback. Merchants simply flag the high-risk orders for follow-up on their purchases.

Fraud Wrangler helps to protect your business from prepaid chargebacks with the following steps:

  • Analyze the order in real-time to determine the potential of a chargeback. Most platforms notify a merchant when a chargeback has been initiated, but early detection of potential chargebacks gives you an opportunity to prevent it. It enables you to provide automatic refunds by intercepting inbound disputes prior to becoming chargebacks.
  • Monitoring purchases and observing trends can help merchants predict whether there will be a chargeback. Fraud Wrangler gives comprehensive status updates by email to notify merchants of the account status and chargeback standing. It also provides merchants with alerts when they are approaching non-compliance and visualizes chargeback status.
  • Manage the inbound disputes by count and cost volume. When merchants have an enormous volume of transactions, it can be difficult to know which ones to give attention to. Fraud Wrangler identifies each case by severity and degree, so you know which ones to focus on.

Mitigate Prepaid Card Chargebacks

LOLA POS works directly with merchants to help them mitigate chargeback issues before they threaten the account. Besides partnering with Fraud Wrangler to identify potential chargebacks, LOLA POS offers suggested business practices to minimize disputed transactions. It also provides monthly optimization and quarterly review to help you maximize your profits when you have chargebacks that occur with every business.

LOLA POS has been your trusted partner and advocate in merchant services since 2004. We combine industry expertise with personalized service to create a positive impact on your business. That’s how LOLA POS Works For You™.

Get started preventing chargebacks today!

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