Red flags: How to spot fraud and protect your small business against chargebacks

Fact-checked by trained fraud agents.

Regardless of age, location, size, and industry, chargebacks (when a customer requests a refund on a purchase through their bank) can happen to any small business, and is riskier with online payments. Unless you meet every customer in person and verify their identity, there’s no way to prove the cardholder is actually the real card owner, or that they have good intentions. But there are steps you can take to minimize this risk.

According to the Canadian Federation of Independent Business, one out of every five small businesses has been the victim of a scam.

And the number of malicious chargebacks has only gone up thanks to the pandemic and the rapid increase in sales happening online. It’s estimated that chargeback costs may reach $117.5 billion globally by 2023.

Unfortunately, falling for a scam can compromise your financial security and personal information, and may also impact your customers and your reputation. But there’s hope! If you educate yourself and your staff about common scams and customer red flags, you can increase the chances of preventing them.

In this article, we’ll give you ammunition for making positive decisions that can protect your business from sketchy payments and bad customers. Grab a pen and paper, and let’s get started.

There are many legitimate reasons a chargeback can happen. But in this article, we’ll focus on two types of chargeback fraud that can negatively affect businesses:

1. Criminal fraud: when fraudsters steal credit card information to purchase goods or services from your business.
2. Friendly fraud: when the cardholder is being intentionally deceptive and disputes a transaction based on false premises, usually resulting in them keeping the product and getting a refund. Sometimes, a customer will claim they didn’t receive your product or service, even if they did. They may falsely claim you charged them twice, or that they never approved the transaction.
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A report by Global Risk Technologies found that 86% of chargebacks are fraudulent, and 58% of these cardholders go straight to the bank for a refund rather than contact the business. According to the Q4 2021 Digital Trust & Safety Index from Sift, one in five consumers have committed friendly fraud on legitimate purchases.

What is the impact of chargebacks on small businesses?

Chargebacks can negatively affect your business’s profit and reputation, especially if you’re just starting out. If you get hit with a chargeback, you’ll usually have to pay a fee ranging from $20 to $100 (Wave’s chargeback fees are $15); suffer the loss (and cost) of the product or service; and have to repay the full amount of the transaction, including the processing fees (even if you’ve already paid them).

If your ratio of chargebacks to sales goes past 1%, your credit card network may force you to enter a chargeback mitigation program at your own expense. Additionally, if your monthly chargeback rates go over a predetermined threshold, you’ll be faced with fines (usually over $10,000) and potential termination of your account. Your payment processor may also consider you high risk and ban you from processing online.

But there is good news: By staying vigilant, you can help reduce your risk of malicious chargebacks—and all the time and stress that comes along with them.

What to look for: The anatomy of a scam

Remember that identifying a scam is the key to prevention. These are some of the most common tactics scammers use:

Trust

• Scammers pretend to be someone trustworthy, like a reputable company or customer in need.

Overly trusting

• They will also be too trusting of you and seem overly cooperative.
• They won’t care about reviewing any drafts or prototypes you create and will freely send you their unredacted payment information.

Playing on empathy

• They’ll provide a sob story to play on your empathy. For example, they might say they are ill or that they have an emergency, and they really need your help.

Urgency

• You’ll feel pressured into making a decision, such as accepting a project on a rushed timeline.
• If you ask to delay for a few business days or hours to consider their sale request, they become aggressive.

Fear

• They’ll intimidate and scare you into making a payment or accepting their demands.

“Too good to be true”

• They’ll present you with amazing business opportunities, like an extremely large order of your product.

Holes in their story

• If you think critically about a customer’s requests and actions, you’ll notice their logic and reasoning doesn’t make sense. They will act and do things in a way you wouldn't yourself.

Undetectable

• They’ll use untraceable payment methods.
• Scammers may overpay you and ask for you to refund them outside of the original method that was used to pay. You should never wire or send them money (especially to a third party). If you need to issue a refund, make sure to submit the refund in the same way that you received the funds.

Brushing off concerns

• If you express concerns about certain aspects of the order or the payment (such as the credit card being in a different name than the person you are communicating with), they brush it off with a vague explanation that doesn't make sense upon closer inspection.

How to protect your small business

Here are some actions you can take to help protect your business from fraud and bad customers, and tips on how to handle red flags once you spot them.

Educate your employees and other small business owners

• Share information about how to spot a fraudster (like this article!) with your staff and other small business employees.
• Tell your employees to alert the whole team if they detect a scam, since frauders usually go after more than one person in a company.

Up your tech knowledge

• Caller ID isn’t always accurate! Scammers can fake their caller ID, so it seems like they’re calling from a reputable organization or an area code in your location.
• Emails and websites can also be faked or hacked. If something seems off, don’t open any attachments or download any files.
• Check if the email address matches the customer’s information, since emails used for fraudulent purposes are often automatically generated.
• Ask the customer to speak with you face-to-face or over a video call.
• See if the customer's name matches the cardholder's name on the payment. Tip: You can view this under Sales > Payments in Wave

Do research

• If you receive an email that looks a little strange (perhaps they used a weird font, or it’s poorly written), try copying and pasting the email into Google to see if other small business owners received something similar.
• Try Googling the customer’s name and business, along with the words “scam” or “complaint” to see what others are saying.
• Check out the customer’s business, along with any reviews, to see if it’s legitimate. Key things to look for are: a good website with working links, testimonials and reviews, and contact information that matches the information of the person you’re interacting with.
• Try calling or emailing the company through the contact information found online or on their website (not provided by the customer) to confirm the order is legitimate.

Trust your gut

• It’s natural to want to see the best in your customers. But if something feels off, your gut is usually right—and you shouldn’t ignore it.
• Don’t make any decisions until you’ve paused, evaluated the situation, and asked others for advice.
• Don’t reply to any suspicious emails or calls, since this may encourage scammers to keep targeting you.

Know how to spot a difficult customer

• Ask yourself if this customer is someone you’d actually like to work with—are they open to communication and signing a contract? Do they know what they want, and can you actually provide it? Why do they want to work with you, and not a competitor or larger company?
• Your customer suddenly asking you to provide more services than you originally agreed to and refusing to pay more; refusing to pay a reasonable deposit; and refusing to sign a contract that protects you and them are all red flags.
• See if other people in your industry have worked with this person, and if they have good things to say about them.
• Have the customer provide you with a signed credit card authorization form (with just the last four digits of the card visible), as well as an image of their ID. Tip: When checking ID, the driver’s license/passport number can also be redacted, but their picture, signature, and address should be visible. Remember that credit card authorization forms won’t make you totally bulletproof.

Spread the word

• If you detect a scam or, unfortunately, become the victim of a scam, you can report it and warn other small businesses in your circle. Canadians can report through the Canadian Anti-Fraud Centre and Americans can report to the appropriate government division.

Example: Avoiding scammers and red flag customers

Imagine you own a screen printing business, where you sell customized shirts and bags. You get an email from someone in a different state, saying they need an order of over 1,000 blank medium shirts. He says it’s an emergency, and he needs the shirts shipped ASAP! The customer does not ask for a consultation, your catalogue, or pricing. He doesn’t even ask for any sort of customization.

The customer seems nice and trustworthy, and it sounds like he’s really in need of the shirts for a special event. He also provided his email, website, and phone number, which all seem legit. But something just doesn’t feel right. While accepting the order (and all the money) right away sounds tempting, it’s best to stop, go back to our checklist, and consider:

• If the customer is ordering 1,000 medium plain shirts and he’s in a different state, why doesn’t he go to a local screen printer?
• Why doesn’t he purchase from a bulk manufacturer of shirts himself, rather than using you as the middle person?

When you get an unusual order like this, try to check in with similar businesses in your area and ask if they’ve heard of or worked with this customer before. You can also talk to a trusted friend, family member, or other small business owner. Sometimes talking through the problem with someone you trust can help uncover flags you have missed.

So, your gut is telling you that something feels shady about this customer. What should you do now? You can politely turn him down with a short, vague email. Don’t be afraid to say “no” and do what’s best for your business.

I think I’ve been scammed. What should I do?

Maybe you’ve already gone ahead with a transaction that feels a bit shady. What now? Your absolute first step should be to stop the order and cut losses. Cancel the orders, issue refunds, back out of the order, or reroute the product to be shipped back to you instead of the customer. You can issue a refund in Wave by following the steps in this article.

Here are more best practices that should help protect you in case you get hit with a chargeback:

Documentation and signatures

When interacting with your customer, get signatures on everything, including:

• The contract
• Payment terms of service
• A credit card authorization form
• A written description of the initial purchase and the items being provided
• An acknowledgement that they have received the product/service
• Confirmation on changes of timelines and scope of a project

If signatures aren’t possible for every step, take pictures and screenshots. This can include:

• The final product once it’s finished or before you ship it
• Before and after pictures with timestamps if you are providing a service done on-site
• Screenshots of your drafts and in-progress work
• Screenshots of the customer downloading the service or logging in to access the service
• A picture of yourself on a video call or in-person meeting with the customer
• If the customer posts about receiving the product/service on their social media, take a screenshot of those posts, or try to get a picture from them when they receive the product/service to show it arrived in their hands
• A picture of the credit card they are using, redacted to only show the last four digits of the card and their name, as well as their ID, which can also be redacted to at least show the address, name, and picture of the customer
• Save PDFs or screenshots of important emails and text messages. Make sure that the email address and/or phone number the customer is using to send you the messages is visible in the screenshots
• If you have a call with the customer and you aren’t able to record it, write a summary of the call, what you discussed, and takeaways, and send it to yourself or the customer via email or text. This allows for a timestamped record of the conversation when a recording isn’t available

Keep all communication in writing as much as possible. And keep all of these documents in a secure place for at least 120 days after the service or product has been provided to the customer. Chargebacks can still happen after the 120 days, so keep the documentation even longer for problem customers.

More chargeback resources

Want to keep the convenience, security, and speed of online payments without the fear of scammers and bad customers? With Wave Payments, you can send invoices, get paid online, and deposit your money, with the added security of having access to trained fraud agents. If you are unsure about an order and want a second opinion, Wave can review the information with you and give our opinion on potential red flags.

Remember: it’s always better to pause than to go ahead and potentially get a chargeback. If your gut is telling you something doesn’t feel right, it’s better to get a second set of eyes on it.

If you’re a Wave customer and a chargeback does occur, make sure you pay attention to the reason code for the chargeback and only provide the documentation that directly addresses that reason code. You can learn more about Wave’s chargeback process here.