MSP Best Practices for Preventing Chargeback Fraud

Investing a little time to understand the chargeback process and effective prevention techniques is a good first step towards solving this escalating problem.

Chargeback Fraud

MSP business owners typically have little time or patience for playing financial games with their clients. Those types of discussions get old quickly from endless excuses about late payments or going back and forth on fees for overdue invoices. You work hard for your clients and deserve to be treated fairly.

Unfortunately, financial-related nuisances continue to grow along with the rising number of payment options today. The latest challenge for MSPs is chargebacks, also commonly referred to as friendly fraud. The cases of clients disputing fair and legitimate charges on their credit cards and ACH accounts or voiding checks before merchants can make a deposit are rising. No businesses, including IT services providers, are protected from these types of behaviors today, and the cost of dealing with chargeback or transaction fraud can be substantial (in both time and money).

The good news for MSPs is that tools and methods are readily available to deal with this threat to cash flow and profitability. Investing a little time to understand the chargeback process and effective prevention techniques is a good first step towards solving this escalating problem.

Mastercard projects global chargeback volume will hit 615 million in 2021. While total cost represents just 0.47% of total revenue for businesses, that deceptively low number is based heavily on lower-end retail transactions that many companies simply write off (it’s often cheaper than disputing the claim).

The average monthly managed services fee is typically much higher. A single instance of friendly fraud could have a significantly greater impact on cash flow and profitability for an MSP than for a convenience store. The dollars tell the story. Monthly client payments are the fuel that feeds growth activities for managed services firms, and delays or disruptions in their revenue streams can upset those plans.

Acknowledge the Problem

Let’s start with the basic definition: chargeback fraud involves a client disputing a transaction with the bank or processor to get free products and/or services. The credit card industry had good intentions when it created the chargeback process. Customers occasionally need a mechanism to resolve issues with non-responsive, combative, or fraudulent suppliers.

The problem is that people quickly figure out ways to abuse any system. Unscrupulous parties leverage the chargeback process to scam businesses by making false claims about the quality of products and service delivery. The convenience of non-confrontational reimbursements also insulates buyers from sellers, which puts merchants (suppliers) on the defense, forcing them to fight banks and credit card companies for the right to be paid.

Your clients can effectively leverage those financial companies’ rules to “opt-out” of payments within a certain time after the fact, recouping those funds without having a discussion with you or your accounting team. The financial industry designed these processes to protect consumers. However, some business owners abuse the guidelines by opting out of previously agreed upon payment, deceiving both the suppliers and the financial institutions that oversee these transactions.

The costs associated with chargeback fraud can be substantial. Imagine a client using a credit card to pay for a $25,000 project, half to cover hardware and the rest towards labor charges, and the decision-makers signing off on the installation and setup. Thirty days later, you find out the customer disputed the transaction, and the processor withdrew the funds from your bank.

While every company assumes some liability then accepting non-cash payments, including credit cards, ACH, and checks, the risk diminishes over time. Clients have an opportunity to dispute transactions for anywhere from 60 days for most credit cards to 120 days for bank EBTs. MSPs should spend time learning some of the more common terms and conditions.

Transaction Fraud Comes in Other Forms (and All Sizes)

The types of financial deceptions facing MSPs are by no means limited to credit and EBT charges. Clients can also dispute and cancel paper checks with the issuing bank, just like with electronic payments.

Most people don’t understand that liability exists even after they receive compensation and seemingly complete the transaction. While the period for reversing payments by check varies between banking institutions, no MSP should feel like that piece of paper in their hands is guaranteed money in their account. In some cases, a person can ‘stop payment’ by simply calling their bank and saying a problem was discovered after handing off a check, though a written notice may be required within so many days.

A devious person might even attempt to recoup the transaction by claiming their check was stolen or acquired through fraudulent activities. Of course, if the bank notifies authorities, the swindler will have some explaining to do and possibly serve jail time.

A Deceptive Phrase

Chargebacks require your clients to take deliberate action. The term “friendly fraud” diminishes the truth; it means someone is intentionally attempting to take back some of your firm’s hard-earned revenue. After all the hard work supporting a business and delivering quality products and services, your company has earned the right to be paid promptly and fully.

People often misuse the chargeback process to claw back funds MSPs won honestly. Those actions are essentially theft of goods and services facilitated by the legitimate processes financial institutions and processors use to protect consumers. Friendly fraud is a threat to your business.

When clients make false claims initiate a chargeback, and reverse the transaction, they harm your business and the relationship. Unfortunately, the process and rules favor the customers, so every MSP should know their rights and ways to shield their businesses from these dishonest and costly methods.

Defending Against Chargeback Fraud

The era of digital transformation is forcing businesses to offer electronic payment options. That development is fueling chargeback fraud, meaning MSP business owners need to double down on both their understanding of these scams and the defenses that can minimize their exposure and financial losses.

These protection measures can help you and your clients. Any business that electronic payments (i.e., credit and EBT cards) or checks could be a future target for chargeback or friendly payment fraud. Few SMBs do full credit and background checks on their clients. Referrals are the most common way providers gain new customers, particularly when asked to help resolve emergency issues. Time constraints and the “trust transfer” from a friend or associate may prevent MSPs from performing a full credit history.

Those breaches in financial protocols can be costly. The trouble with evaluating “colleagues of reliable customers” is that the screening process may not be as thorough as for prospects MSPs land on their own with no strings attached. No one wants to offend an existing client by subjecting their referrals to too much scrutiny. However, even when the most revered customer makes an introduction, MSPs cannot afford to let their guard down, especially when it comes to checking reputations and credit history.

Key Steps for Preventing Chargeback Fraud

As with most security and compliance concerns, people are the best and first line of defense against fraudulent payment (in this case, refund) procedures. With resources like the internet and cost-effective credit inspection services, assessing prospective clients’ financial practices and business reputations is easier than ever before.

From the Better Business Bureau website and Google business reviews to a host of companies offering background checks, it takes just a few minutes to perform a basic screening today. Financial concerns and customer complaints quickly rise to the top. However, MSPs should proceed cautiously with these reviews and avoid putting too much value in a couple of complaints (or glowing reviews). Look for consensus or trends in the comments.

While trust is the foundation of a great relationship, unfortunately, some of today’s business owners are not as responsible or ethical as others. Some customers will jump on any minor mistake or perceived issue. MSPs need to collect as much information as possible upfront and continually refine their contracts to protect the best interests of everyone. That may mean walking away from potential or current clients.

Determining whether prospects are reputable is not an easy job. MSPs can do an online search and see if anyone or any business has filed any grievances or liens in the past. If the lead is a referral, asking the originating party for information on the company’s community standing is a good first step. That can be a tricky conversation. Asking too many questions about finances and the organization’s reputation might offend a referral partner and prevent them from making other recommendations in the future. An open conversation about the company’s history and business partners can uncover quality information, including any red flags that might be a cause for concern.

A little due diligence can help MSPs understand their potential liability of bringing on that client. The bigger the project or commitment, or less restrictive the contract and financial terms, the higher the risk. In 2021, it’s not an unreasonable requirement to ask clients to commit to storing their preferred payment method(s) on file and signing up for autopay through an integrated payments automation platform like ConnectBooster. Asking prospective clients to follow these types of processes at the outset of the relationship is a great way to sniff out fraudsters. Resistance to storing payment information in a secure location and committing to autopay could be cause for concern.

Chargeback fraud undermines the business relationship. While a client has a right to challenge questionable or vague charges, there should be a clear process for resolving those issues without using the banking/credit system for leverage. Good business relationships are built on trust, which means each party should be willing to talk through problems before pulling the “nuclear option.” Using clear and concise language in contracts and reviewing all the key details, including payment requirements and how to handle exceptions, helps minimize the chargeback issues with clients.

After doing its due diligence, if an MSP is still uncertain of the credibility of a prospect asking them to take on a project or deliver a new service, they should ask for a wire payment. These transactions are secure and finite and help eliminate chargeback fraud and other forms of non-payment.

Relationships Are Stronger When Everyone has “Skin in the Game”

Business owners prefer to work with people they trust and admire. So, a new client should not be upset if an MSP asks for some form of collateral before starting a large project or ramping up a major support program. You earn trust through quality work and long-term performance. Requesting wire transfers or the use of a secure payment portal shows the provider runs a safe business.

Most sensible entrepreneurs recognize that other business owners also need to protect their organizations, employees, and partners, especially in today’s high-risk environment. Establishing mutual trust is essential to a long-term relationship. With that understanding, putting some “skin in the game” with at least minimal financial assurances should not be a major obstacle.

MSPs must recognize the risks associated with friendly fraud. That means reviewing all the potential scenarios with team members and building a firm payment policy to safeguard the relationship and the firm.


Ryan Goodman

Ryan Goodman is the President and Co-Founder of ConnectBooster. With more than 10 years in the IT channel, he has helped thousands of MSPs improve their cash flow by shifting their business’ billing systems from “recurring invoicing” models to recurring automated payments. Ryan also hosts the ConnectBooster podcast, “Confessions of an IT Business Owner.” The podcast shares inspirational, honest stories about what it takes for a tech business to survive and thrive, from fellow IT leaders.