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The Green Sheet Online Edition

April 08, 2019 • Issue 19:04:01

Blockchain might not solve chargeback and ecommerce fraud

By Suresh Dakshina
Chargeback Gurus

Is blockchain technology the way to fight chargebacks and chargeback fraud for ecommerce retailers? This question is becoming more important as we look for ways to secure ecommerce transactions, which continue to grow exponentially each year. With more transactions, the likelihood of additional chargebacks, including fraudulent claims, increases. But is blockchain the answer?

Some have hailed the emergence of blockchain as a way to secure ecommerce transactions in a time when massive breaches have exposed countless individuals to cyber criminals. However, before we put all our eggs in the blockchain basket, we need to examine whether the technology is ready to protect merchants from chargebacks and fraud.

Data breaches have caused great stress for ecommerce and card-not-present merchants because when credit card data gets out into the open, the resulting unauthorized use drives cardholders to file chargebacks, adding cost and time on top of the damage done by the initial breach.

Blockchain, which is a decentralized, distributed and public digital ledger used to record transactions across many computers so that any involved record cannot be altered retroactively, can be an asset in preventing identity theft and cardholder information from being stolen, because it can be difficult to extract that data from a blockchain system.

True versus friendly fraud

Blockchain may play a role in preventing true fraud because most true fraud comes from stolen credit cards or identity theft. Again, since blockchain can provide security for cardholder data, it is possible chargebacks resulting from true fraud and identity theft can be slowed. Also, a blockchain payment system creates a wall that prevents customer data from being stolen, thus reducing opportunities for true fraud, which is a welcome advancement for merchants.

Going forward, we will see numerous exciting developments in blockchain technology, but as of now, we have barely scratched the surface of this technology. We still don't know how effectively blockchain will be in fighting true fraud. Fraudsters tend to stay ahead of the curve and, as we all know, when a new system comes along, it tends to come under attack by criminals searching for vulnerabilities.

This is the case for blockchain. Because there are few case studies and little data about the technology, there is no way to predict how effective it will be against true fraud, but it looks like it holds good possibilities.

Unfortunately, with friendly fraud, which is the most pernicious and costly form of chargebacks for merchants, blockchain is not yet a solution. Friendly fraud is out of reach for blockchain because much friendly fraud is based on claims that the product purchased didn't arrive, that the order should have been canceled or that a family member made an unauthorized purchase with the card. Those are common reasons for friendly fraud chargebacks, but there is no way to use a payment system to prevent them.

Friendly fraud is going to prevail against blockchain because it is perpetrated by people making false claims that are nearly impossible to verify using any kind of payment system. No existing technology can predict the human emotions that often drive friendly fraud.

Prevention measures for true and friendly fraud

To prevent true fraud, merchants have a number of options that will help fight criminal activity, including:

  • Incorporate fraud prevention tools designed to identify stolen or compromised credit cards.
  • Activate AVS or CVV to screen out stolen cards.
  • Manually investigate address mismatches and overnight shipment requests (many fraudsters use overnight shipping to rush orders before the merchant can identify and act upon signs of fraud).
  • Verify addresses by calling or emailing customers when needed.

Friendly fraud is difficult to prevent. By definition, every instance of friendly fraud arises from a legitimate transaction – there's no way to predict when it will occur. However, safeguards can mitigate its impact. The first and most important line of defense is your customer service. Here are several other actions merchants can take:

  • Have a clear, comprehensive refund policy that makes it easy for customers to return unsatisfactory products and request a refund.
  • Use a fast fulfillment system.
  • Make sure you have easy to reach, attentive customer service staff. Track return shipments so that refunds can be issued promptly
  • Use clear transaction descriptors that reference your store name so customers don't get confused when they review their credit card statements.
  • Set realistic expectations for your products, and avoid misleading marketing and promotions.

These recommendations can help merchants protect themselves from true and friendly fraud, but depending on blockchain at this time as a panacea is premature. Blockchain is not ready to take on all of the challenges as a payment technology, as we are still figuring out where in the payment ecosystem it belongs. I do look forward to new blockchain developments and believe it will play a role in securing e-commerce technology in the future. end of article

Suresh Dakshina is the president of Chargeback Gurus. A pioneer in data analytics and industry-specific risk management, he is a certified ecommerce fraud prevention specialist and Certified Payments Professional. He understands first-hand the challenges that business owners face, especially when it comes to chargebacks and fraud. Contact him at suresh@chargebackgurus.com.

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