Small businesses losing thousands to fraudulent online chargeback claims

Shoplifting has long been the bane of small businesses and now thieves have moved online, with frustrated traders reporting customers making fraudulent claims for their money back.

The fake refund claims — instigated by shoppers requesting transaction reversals, known as "chargebacks", through their banks — have been labelled theft and led to shop owners calling for greater protection from cybercriminals.

Sydney fashion boutique owner Ainslie told The Business she had lost thousands to chargebacks in recent months and had little success convincing banks not to take money back after purchasers falsely disputed charges on their credit cards.

Ainslie, who asked to be identified by her first name only, said she had not heard of the practice until she was duped by a woman who seemed like a genuine customer — a case of what has been dubbed "friendly fraud".

"I actually did speak to [her] on the phone, so she actually asked me about the sizes and I told her what size to get and she then ordered it online," Ainslie said.

'Money had been already taken from our account'

A chargeback is the reversal of a purchase, in this case online, initiated by a customer through their bank.

Customers may lodge legitimate chargebacks if they are charged for an order they never receive and are denied a refund by the retailer, or if they notice card charges for purchases they have not made.

However, fraudulent chargebacks, when customers receive their order, claim a refund and keep the item, mean retailers are being left out of pocket and with no way to recover their stock.

In the past eight months, Ainslie lost more than $2,000 to one fraudulent chargeback and $560 to another.

She said there was no avenue to retrieve the money or the items.

"The money had already been taken from our account both times before we really even had the chance to write anything about the dispute," she said.

Hundreds of messages from small businesses

Victorian boutique owner Sam Kemp took to social media in frustration after falling victim to two fraudulent chargebacks in a week.

Despite keeping evidence that the orders were fulfilled, Ms Kemp said it was not enough to stop the refund being taken.

"I had confirmed with the customers before sending these orders out, they had confirmed they'd placed the orders … and then I even have photos from Australia Post that the parcels were delivered … and then the chargeback comes through," she said.

Ms Kemp, who sells fashion and giftware at Sare Store in Birchip, western Victoria, did not realise how many others had been hit by the fraud until she posted her video on social media.

"I've had hundreds and hundreds of messages from other small businesses, messaging the same thing happening to them," she said.

"It really does eat into the profit at the end of the day because there's not a lot of profit."

The experience and response from fellow business owners prompted Ms Kemp to arrange meetings with members of state parliament to raise the alarm

"This is just another added pressure for small business … it's fraud, it's theft," said Nationals MP Jane Benham, Ms Kemp's local member.

Victoria's opposition small business spokesperson, Brad Rowswell, who also met the retail owner, said he would contact each of the major banks and ask them to step up.

"Banking institutions need to realise just how tough it is to operate your small business in the first place, let alone go through this hoop and that hoop … only to get the wrong answer," he said.

A spokesperson for the Australian Banking Assocation said: "Card schemes like Visa and Mastercard have specific rules about the basis upon which chargebacks can be raised and the timeframe in which they must be raised.

"Banks are aware of these concerns from small businesses and, where possible, banks will work with small businesses to resolve any disputes as quickly as possible."

A spokesperson for Visa said it had recently introduced rules "allowing businesses to use historical purchasing data to fight 'friendly fraud'".

Visa said the measures were designed to protect businesses from "repeat chargeback abuse".

E-commerce ripe for 'friendly fraud'

Payments expert Brad Kelly said the "sheer volume" could be one reason small businesses might be unsuccessful disputing fraudulent chargebacks.

Mr Kelly co-founded the Independent Payments Forum, which represents about 120,000 small businesses and their payment systems.

"The amount of transactions that we're doing in e-commerce … has skyrocketed to the point where this time next year, we will do more 'card not present', so e-commerce transactions, than we will 'card present,'" he said.

"That's a complete shift in the way that the payment system works. In many respects, the dispute and chargeback processes have not kept pace with that."

Chloe Watts, who runs online bookstore Blueberry Co, recently provided evidence of a customer confirming she had received her products after a chargeback request.

"I lodged all of that with screenshots of emails, text messages of the customer saying, 'No, I did receive the order' … and it still was denied," she said.

"If someone comes in and steals stock, there are security protocols that you can put in place.

"You can have cameras, you can then lodge that with the police and say we have evidence that someone's stolen. [For online theft], there is nothing for us to do."

Mr Kelly said "card not present" transactions that did not involve a customer presenting a card in person were vulnerable to what he called "friendly fraud", in which shoppers exploit the system designed to protect them from fraudulent transactions using digital wallets.

"There are bad actors who know that there is a zero liability feature … where, if you genuinely didn't make the transaction, then you're not liable for it," he said.

"Now, that's great in theory but it's not really designed to apply to a small business."

He said challenging a chargeback could be expensive, and at times, "not worth pursuing".

However, he warned that could impact the risk profile of a small business and affect their ability to keep operating online.

"The more chargebacks they get, the more red flags are on their account," Mr Kelly said, noting banks or payment platforms could "exit" businesses if they had too many red flags.

"This becomes a really difficult situation very quickly for merchants who are acting in good faith."

He said if a small business had a dispute denied, they could escalate it to the Australian Financial Complaints Authority (AFCA).

"The more merchants that we can get to start raising these issues with [AFCA], the better … because at the moment it's a very unfair and unbalanced system for small and medium businesses."

A spokesperson for NSW Police told ABC News fraudulent chargebacks were dealt with via banks and their regulators, not police.

A Victoria Police spokesperson said the issue was "between local businesses and banks" and police could only investigate when crimes were reported.

AFCA was contacted for comment.