The jury's still out on blockchain as a payment fraud weapon
Is blockchain technology the way to fight chargebacks and chargeback fraud for e-commerce retailers? This is a question that is becoming more important as we look for ways to secure e-commerce transaction which continue to grow exponentially each year.
With more transactions, the likelihood of increasing the number of chargebacks, including fraudulent claims, increases. But is blockchain the answer?
Some have hailed the emergence of blockchain technology as a way to secure e-commerce transactions in a time where massive breaches have exposed countless individuals to cybercriminals. However, before we put all of our eggs in the blockchain basket, we need to examine whether the technology is ready to protect merchants from chargebacks and fraud.
Data breaches cause great stress on e-commerce 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 that is used to record transactions across many computers so that any involved record cannot be altered retroactively, can actually 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.
How this relates to the major culprits merchants have to do with regarding chargebacks — true fraud and friendly fraud?
For true fraud, blockchain may play a role in preventing this from occurring because most true fraud comes from stolen credit cards or identity theft. Again, since blockchain can provide security for card holder data, it means that there is a possibility that chargebacks resulting from true fraud and identity theft can be slowed. Also, when a blockchain payment system is in place it creates a wall that prevents customer data from being stolen, thus reducing opportunities for true fraud, which is a welcoming advancement for merchants.
Going forward, however, we will see a lot of exciting developments in blockchain technology, but as of now, we have barely scratched the surface yet with this technology. So we still don’t quite 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 definitely the case for blockchain. Because data and case studies about the technology are scarce, 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 for this problem. Friendly fraud is out of reach for blockchain at this time because much of friendly fraud is based on claims that the product purchased didn’t arrive, or that the order should have been canceled or that a family member made an unauthorized purchase with the card. Those are very common reasons for friendly fraud chargebacks, but there is not really a way to use a payment system to prevent those chargebacks.
Friendly fraud is going to prevail against blockchain because it is caused by people making false claims that are nearly impossible to verify using any kind of payment system. It is very challenging and there is no technology that can predict human emotions that often drive friendly fraud.
To prevent true fraud, merchants have a number of options that will help them fight criminal activity, including the incorporation of fraud prevention tools designed to identify stolen or compromised credit cards. Merchants can also activate AVS or CVV to screen out stolen cards; manually investigate address mismatches and overnight shipment requests, since many fraudsters use overnight shipping to rush orders before the merchant can identify and act upon signs of fraud; and 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, there are safeguards that can mitigate its impact on your bottom line.
The most important line of defense is your customer service. Here are several other actions merchants can take: Have a clear and comprehensive refund policy that makes it easy for customers to return unsatisfactory products and request a refund; use a fast fulfillment system; make sure there is an easily-reachable and 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; and 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 trying to figure out where in the payment ecosystem it belongs. But I do look forward to new developments with blockchain and believe that it will play a role in securing e-commerce technology in the future.