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How MSPs Can Avoid Chargeback Fraud

Apr 7, 2021

Commonly referred to as friendly fraud, chargebacks are a nuisance. The instances of customers disputing reasonable charges on their credit cards, ACH payments, or canceling checks are happening far too often for many businesses these days. The MSP community is not immune from these types of scams, and the costs associated with a chargeback or transaction fraud can be quite substantial.

The first step in combating chargebacks is to gain a better understanding of this growing problem. Chargeback fraud is when a customer disputes a transaction with the bank or processor instead of contacting the seller or provider for a refund. Essentially, the purchaser or client leverages the financial companies’ rules to “opt-out” of the sale and get their money returned without directly notifying the company supplying them with services or products. While these policies’ original intent is to protect consumers, some companies and individuals abuse these policies by canceling valid transactions, thereby defrauding the sellers and the processors/banks.

For example, imagine your MSP landing a $10k project from a client referral, with half the investment in hardware and the rest paying your estimated labor costs. You receive a credit card payment for the full amount, and all their decision-makers are pleased with the installation and setup. However, 30-days later, that client disputes the transaction, and the processor withdraws the money from your company’s account.

Now, there is a liability when accepting any transaction electronically. Whether your clients pay with credit cards, ACH, or even checks, there is a certain period before the risk goes away. Depending on the bank, customers can dispute a transaction for between 90 and 120 days, and for credit card payments, the magic number is 60 (days).

Chargeback risks go beyond electronic

As mentioned previously, transaction fraud is not limited to credit cards and EBTs. Written checks are very similar to ACH in that a customer can still dispute charges.

Most people don’t understand that even after receiving payment, a liability still exists, and the period for contesting these transactions vary by the banking institution. Even when your company gets a check, there is no guarantee that that money will make it to your account.

Clients may file a ‘stop payment’ order on paper checks or ACH payments before those transactions close. Not much is required other than telling their bank that you noted an issue after making or sending the payment.

Of course, if that person were really dishonest, they can try to reverse transactions by reporting theft or fraud promptly. The problem with that process is it can have negative repercussions if the police get involved.

Friendly fraud is a misleading term

Chargebacks are an intentional act. When people use the term “friendly fraud,” it diminishes the fact that a client knows they are defrauding your company out of its hard-earned income. When your team delivers promised products and services, you expect to be paid for that time, effort, and related expenses.

The consumer is manipulating the chargeback process to secure an undeserved refund. Their intentions are not good and amount to theft of services and goods, with financial institutions and processors unintentionally running interference.

Of course, the majority of the blame falls on customers who not only make false claims but usually have to justify their request to reverse the transaction. Due to the way the system is weighted in the favor of customers, MSPs have to know their rights and how to defend themselves from this unscrupulous practice.

Lack of validation is part of the problem

With so many people expecting businesses to provide electronic payment options, these issues are sure to escalate, and the owners of IT services companies have to increase their awareness and defenses. These are the types of protection you should employ in your own firm, as well as a service you can provide to your clients.

Any business that accepts credit, EBT cards or checks could be a potential victim of chargeback or transaction fraud. With referral business, especially with emergency projects, you may not have much time to research the company’s credit history. How trustworthy will that company be as a customer?

The problem with vetting the “friends of trusted clients” is the process may not be as solid as for companies you pursue through other means. These relationships often begin with emergency or quick projects, and when a respected customer makes the introduction, it is very easy for MSPs to let their guard down.

A few easy ways to avoid payment fraud

Owners and employees are the most effective first line of defense against these deceptive payment practices. With the internet at your disposal, it takes very little time to vet new clients properly.

Check in the Better Business Bureau portal and search reviews on Google and other websites. Issues on the financial side or complaints are fairly easy to spot, but you should always exercise caution and be careful not to generalize based on one person’s grievance.

Every business has that one customer willing to wage war over a simple misstep. Base your opinions on overall trends and collect as much information as possible to support a case for or against taking on that business as a client.

Are they trustworthy? Have other business partners filed complaints in the past? Be sure to ask the referral source for as much information as possible without overstepping your bounds or discouraging them from recommending your firm in the future.

Do a little bit of due diligence to understand the potential liability. The bigger the project or commitment on your side, the greater the risk. Do you trust that prospect to make (and follow through with) an electronic transaction? Keep in mind that “statute of limitations” in which they may dispute a payment and withdraw the money, whether that equals 60 or 120 days. Services like Experian or Credit Karma make checking credit histories quick and affordable.

If you are still unsure, ask the company for a wire payment. These transactions are secure and finite. That may sound prohibitive for a business, but if MSPs are uncertain of their trustworthiness when taking on a project or deliver a new service, this will provide a good safety net.

Smart decisions help forge stronger relationships

People want to work with those they respect. Asking a potential new business partner to provide some collateral upfront shows you run a secure operation.

Most reasonable people understand that entrepreneurs need to protect themselves, their employees, and the companies they support in today’s risky environment. The chances are good that the decision-makers will want to establish trust and build a long-term relationship, so giving your firm some financial assurances upfront should not be a big deal.

When it comes to business, you need to trust your gut and teach your staff about friendly fraud. Be aware of all the potential scenarios and build a firm payment policy to protect your company. Above all, do everything you can to avoid becoming a victim of “friendly fraud.”

Want more advice? Be sure to see us at this upcoming event

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