The Growing Threat of Prepaid Card Fraud and How It Leads to Chargebacks?

The rise of eCommerce has created new opportunities for both businesses and fraudsters alike. Among the most pressing threats in today’s digital landscape is prepaid card fraud, a tactic that allows criminals to exploit the lack of stringent security measures tied to prepaid cards. 

This type of fraud is particularly insidious because it often leads directly to chargebacks, leaving merchants to deal with the financial fallout. 

As fraud tactics evolve, so too must the strategies businesses use to protect themselves, making it essential for online retailers to understand how prepaid card fraud works and the costly chargebacks that follow. 

Addressing this growing issue requires a robust chargeback management approach that can mitigate the damage caused by fraudulent transactions.

What is Prepaid Card Fraud?

Prepaid card fraud happens when fraudsters exploit prepaid cards—typically anonymous or easily obtained—for fraudulent transactions. Unlike traditional credit or debit cards, prepaid cards lack robust security measures like account verification or credit checks, making them easy targets for criminal activities. 

Fraudsters usually use stolen or fabricated card information to make purchases, transfer funds, or engage in money laundering schemes.

This fraud is increasingly prevalent, with the global prepaid card market projected to grow significantly. This rise in usage has unfortunately attracted more fraudulent activity. 

In fact, according to a Science Direct study, losses from prepaid card fraud in the U.S. are estimated to exceed $1 billion annually, highlighting the magnitude of the issue for businesses.

How Does it Affect the eCommerce Store?

Fraudulent transactions made with prepaid cards often lead to chargebacks, in which the merchant is forced to return the payment to the customer’s card-issuing bank. 

Chargebacks not only result in revenue loss but also come with additional penalties, such as chargeback fees and potential damage to the store’s reputation with payment processors.

Moreover, fraud detection in prepaid cards is more challenging due to their anonymity and lower oversight. Businesses face heightened risks of fraud-related chargebacks, which lead to long-term financial strain, higher operational costs, and the potential for being blacklisted by payment processors.

Prepaid card fraud is, therefore, a growing threat for online retailers, pushing them to implement more stringent fraud prevention strategies to minimize chargeback risks and protect their revenue streams.

How Does this Lead to Prepaid Card Chargebacks?

Prepaid card fraud often directly results in chargebacks, which occur when a cardholder disputes a transaction, claiming it was unauthorized or fraudulent. 

In the case of prepaid cards, fraudsters use stolen or falsified card information to make purchases, and once the legitimate cardholder or card issuer detects fraudulent activity, they initiate a chargeback to reverse the transaction. 

Merchants are typically required to refund the payment and cover any associated fees.

The anonymity of prepaid cards exacerbates the risk of chargebacks. Since prepaid cards don’t require the same level of verification as credit or debit cards, fraudulent transactions are harder to detect before they occur. 

Merchants often face delayed notifications of fraud, meaning by the time they realize a transaction was fraudulent, the chargeback process has already begun. 

This makes prepaid cards a favored tool for fraudsters, leading to an increase in chargebacks for businesses that accept them.

Process Around Prepaid Card Chargeback Fraud

The process of managing prepaid card chargeback fraud involves several stages:

1. Fraudulent Transaction: A fraudster uses a prepaid card to make a purchase, often bypassing standard security measures due to the card's anonymity or ease of acquisition.
2. Dispute Initiation: Once the cardholder or issuing bank identifies the unauthorized transaction, they file a dispute with the merchant’s acquiring bank. The merchant is informed that a chargeback is being requested.
3. Evidence Gathering: The merchant must gather evidence to contest the chargeback if they believe it is illegitimate. This could include transaction logs, shipping records, or customer communication. However, in the case of prepaid cards, the fraud may have been difficult to detect, making it challenging for the merchant to provide sufficient evidence.
4. Chargeback Resolution: If the merchant cannot provide compelling evidence that the transaction was legitimate, the chargeback is approved, and the merchant is required to refund the purchase. In addition to losing the transaction value, the merchant is often charged a fee and risks damaging their standing with payment processors.
5. Impact on Merchant: Repeated prepaid card chargebacks can result in significant financial losses for businesses. High chargeback ratios may lead to increased fees from acquiring banks and, in extreme cases, the termination of payment processing services, effectively cutting off a merchant’s ability to conduct online transactions.

Manage Chargeback Fraud with ChargePay

Effectively managing chargeback fraud requires a solution that simplifies the dispute process while increasing the chances of successful outcomes. 

ChargePay is designed to do just that, offering businesses an AI-driven platform to streamline chargeback management from start to finish. By automating evidence gathering, response creation, and submission to banks and card networks, ChargePay helps merchants reduce manual workloads and improve efficiency. 

This leads to faster dispute resolutions and a higher success rate in recovering lost revenue from illegitimate chargebacks. 

Ready to take control of your chargeback process? 

Book a demo with ChargePay today and see how we can help your business manage chargeback fraud more effectively.