Misconception of the UNAUTHORIZED claim costing millions to online merchants

Merchants know this all too well, a simple letter (FAX) from the credit company claiming “unauthorized use” of credit card, with BIG implications:

  1. Fraudulent use of a card
  2. Probable loss of the dispute
  3. Loss of funds including shipping and chargeback fees

At this point most merchants simply accept liability, unwilling or unable to deal with it, waiving the slightest chance of winning the dispute. Truth is many times there is much that can be done. It all begins with the difference between what regulations define as an authorized user of a credit card and what the customer mistakes it for.

Many times, a customer disputes a transaction as unauthorized while infact it was made by a user they have authorized in the past, though they did not get approval for the specific transaction.  We at FUGU have recently learned that such cases are on the rise and are highly recoverable if one can provide an elaborate “buyer” interaction trail.

What seems like an irrecoverable dispute can be proved to be an emotional abuse of the chargeback system

Regulation states that any user who has been authorized to use a card even once is an “authorized” user and any purchase they make from now on with those credentials is authorized. This distinction is rarely known or pointed out to parents and other relations claiming chargebacks due to no authorization while in fact they were made by previously authorized users.

Often these charges are disputed as part of a household dynamic. Striking the charges in aggravation does give some emotional satisfaction, but chargeback policies are not a parenting tool, or any other kind of tool, other than a way to secure online buying. Eventually these households are left with both merchandise and money, and some emotional satisfaction, all gained on the backs of merchants. Many are unaware that credit card fraud, implied by a chargeback, in some states is a class 4 felony punishable by jail time.

What seems like an irrecoverable dispute can be proved to be an emotional abuse of the chargeback system at the expense of small merchants and giants like Amazon, Gaming Consoles, Travel apps such as Uber and many others.

There is a lot to be done

In many cases it is abundantly clear that the cardholder and the customer/recipient of goods share a household but how can a merchant distinguish between authorized and non-authorized users at POS? The simple answer is that they can’t. They will have to find a way to stay alerted for additional signals using transaction monitoring systems like FUGU.

While there are some pre-payment signals that may help predict such risk e.g. a discrepancy between cardholder and recipient, type and time of purchase, they are all highly inconclusive.  Cross referenced with further post payment signals such as over engagement and IP discrepancies, gives merchants clearer insight into the household dynamics for example, warranting perhaps, some preemptive actions such as double confirmations and physical delivery enforcement. Beyond trying to predict and mitigate these fraud cases, merchants should try to make it as inconvenient as possible for abuse. One possibility would be to make the interaction trail with the buyer apparent to the recipient and the card holder. Such trail also serves as representable evidence in case of a dispute.

The unauthorized claim is a form of Friendly Fraud that is simply impossible to detect at POS because it is committed by the cardholder or by someone that has already been given the credentials for other purposes. Real unauthorized use, would have been quickly recognized somewhere in the payment system. If there is a chargeback for unauthorized use by an authorized user, then it should follow that the recipient in many cases the card holder’s child / friend has committed credit card fraud. For many reasons, this option is rarely pursued due to lack of monitoring.


FUGU shows 60% recovery for such types of disputes

But don’t give up, when cardholders are made aware of the evidence tying their authorized relations to a transaction and what the dispute could mean legally a very high percentage (above 60%) will assume liability and cancel their disputes. In the current unfair payment system, online businesses, especially small and medium need to deploy post-payment transaction monitoring tools like FUGU.  Ones that not only alert, but also make the entire interaction trail representable in case of a dispute.

FUGU is also available for immediate installation on the Shopify App store  FUGU ‑ The Payment Risk Hub | Shopify App Store