Voice of the Industry

Tackling chargeback fraud: protecting your video game business

Friday 25 August 2023 09:10 CET | Editor: Diana Lupuleac | Voice of the industry

Anton Zelenin, Chief Product Officer, Fintech at Xsolla, shares insights into how chargeback fraud affects businesses and suggests strategies to counter it.


Chargeback fraud is a significant concern for businesses in any industry, as it can cause financial losses and negatively affect a brand's reputation. The following article represents an exploration of the direct and indirect impact of chargeback fraud on businesses and includes five recommendations on how to combat it. By adopting these best practices, businesses can protect their revenue, customer relationships, and operational efficiency against the challenges posed by chargeback fraud.

What is chargeback fraud?

Chargeback fraud happens when a customer falsely disputes a legitimate charge, aiming to get a refund. The bank usually sides with the customer, leaving the merchant to deal with the chargeback dispute and resulting financial losses.

Prevention can be challenging because pinpointing the fraudulent activity that caused the chargeback is often tricky. There are two primary types of chargeback fraud, and by understanding and differentiating between them, businesses can tailor their prevention strategies accordingly.

1. Criminal fraud occurs when individuals use stolen credit card information or engage in unauthorised transactions to make purchases. When the legitimate cardholder notices the unauthorised charge they initiate a chargeback, prompting the bank to refund their money.

2. Accidental fraud, or ‘friendly fraud’, occurs when a legitimate customer makes a purchase but later forgets or doesn't recognise the transaction. As a result, they contact their bank to dispute the charge, unintentionally initiating a chargeback.


The impact of chargeback fraud on businesses

Both types of chargebacks significantly impact a business's finances, as they can reduce revenue and cause the business's chargeback rate to rise. Direct costs include:

  • Chargeback fees. Every chargeback claim incurs a fee. Besides credit card processing fees, this can amount to a hefty sum.

  • Lost inventory. If the bank validates a customer's claim, the business must issue a refund, but the customer is not obligated to return the purchased goods. That means the company can potentially lose both the sale and the merchandise.

  • Monitoring programme costs. Card schemes like Visa and Mastercard monitor chargeback ratios. If it exceeds a certain threshold (e.g., Visa's 0.65% or Mastercard's 1%), the business may face fines and monitoring until the ratio improves.

Indirect costs include:

  • Operational expenses. These are unreimbursed operating costs, such as production, packaging, and shipping. Businesses must also invest time and personnel to dispute chargebacks, often involving dedicated fraud analysts and monitoring programmes. 

  • Cost of lost opportunity. Every order that results in a chargeback could have instead been a successful order with another customer. Over time, the loss of potential revenue can compound and impede company growth.


How to prevent chargeback fraud: five best practices

You can take several preventive measures to help minimise the risk of chargeback fraud. Xsolla recommends the following five:

1. Chargeback guarantee. The vendor’s promise to reimburse merchants for approved orders that prove fraudulent allows merchants to accept more orders, discourage fraudsters, and ensure loyal customers return without the risk of costly chargebacks.

2. Stop criminal fraud pre-authorisation. Preventing chargeback fraud is vital. An anti-fraud approach can avoid chargebacks using trust signals like email and shipping addresses. Advanced artificial intelligence (AI) and machine learning (ML) automate approval decisions and reduce manual reviews. Pairing AI fraud solutions with custom policies based on risk thresholds ensures accurate risk assessment.

3. Intercept and deflect friendly fraud cases post-authorisation. Businesses can offer refunds or clarify customer purchase details. Allowing issuing banks to request information helps customers recognise unfamiliar transactions, reducing unnecessary disputes. Additionally, gaining insights from chargeback data aids in improving risk assessment and reducing false positives.

4. Win chargebacks. 39% of shoppers initiate more disputes nowadays than in 2020. Businesses need robust transaction data and expert assistance to prevent chargebacks and ensure successful outcomes. Integrating fraud prevention solutions or chargeback management services can reduce dispute costs and improve win rates. Partnering with third-party providers helps businesses avoid chargebacks by preventing them upfront.

5. Update business policies to avoid legitimate disputes. To prevent legitimate disputes, regularly updated refund policies, return policies, and customer support protocols are key. Experiencing the customer journey firsthand by placing orders, processing refunds, and contacting support can reveal areas for improvement.


How Xsolla can help combat chargeback fraud

  • Customer support. Xsolla's team works closely with users to address issues before chargebacks occur, guiding customers to request refunds through the business instead of the bank, therefore saving time and money.

  • Xsolla Anti-fraud. The system detects fraud patterns in games 24/7, stopping fraudulent activity and gathering data for potentially fraudulent purchases. The system can be customised for specific games and genres.

  • Dispute management. If a chargeback happens, Xsolla's team collects all relevant evidence, processes disputes and follows up with issuing banks. This hands-on approach results in a significant win rate for disputes.


About Anton Zelenin

Anton Zelenin is the Chief Product Officer, Fintech at Xsolla, a provider of innovative payment solutions and products tailored for game developers and publishers. Boasting nearly a decade of experience at Xsolla, Anton manages the company's extensive payment product line, which includes Pay Station, Push Payments, GShare, subscription payments, and anti-fraud measures. Under Anton's leadership and unwavering dedication, Xsolla has broadened its global reach to millions of ardent gamers, streamlining the sale and play of video games while boosting profitability for the gaming community.

About Xsolla

Xsolla is a global video game commerce company with a robust and powerful set of tools and services specifically designed for the video game industry. Xsolla’s mission is to solve the inherent complexities of global distribution, marketing, and monetisation for game developers and publishers. Headquartered and incorporated in Los Angeles, California, with offices worldwide, the company supports major gaming titles like Valve, Twitch, Roblox, Ubisoft, Epic Games, and more.

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Keywords: chargebacks, fraud detection, fraud prevention, ecommerce, friendly fraud, artificial intelligence, machine learning, risk management
Categories: Fraud & Financial Crime
Companies: Xsolla
Countries: World
This article is part of category

Fraud & Financial Crime


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