Buyer-beware scams are in the headlines every day, but a growing number of buyers are ripping off businesses by reversing charges on their purchases. This is a seller-beware scenario.
Imagine you run a precious metals store and a customer wants to buy $3,000 worth of gold via wire transfer. You verify their identity, complete the sale and hand over the gold. All by the book, right?
Must Read
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don’t have to deal with tenants or fix freezers. Here’s how
- I’m 49 years old and have nothing saved for retirement — what should I do? Don’t panic. Here are 6 of the easiest ways you can catch up (and fast)
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and 3 simple steps to fix it ASAP
Not quite. A month later, the customer calls their bank to dispute the charge, claiming they were tricked into buying the gold by a third party.
The bank is convinced by the customer’s story, cancels the wire transfer and withdraws money from your merchant account, leaving you without payment — and your store down $3,000 worth of gold, which is hard to trace.
The same thing can happen with customers who request the reversal of electronic fund transfers (EFTs) or credit card charges. Such transactions are called “friendly fraud" or "chargeback fraud." [1]
The customer may indeed have been the victim of a scam, or be pulling off a scam themselves. Either way, your business is left with a loss.
Unfortunately, it’s not an uncommon occurrence, particularly for businesses dealing in precious gems and metals, which are frequently targeted in scams.
Here’s what happens and how to protect your business.
Banks often side with customers in cases of alleged fraud
Banks typically allow chargebacks or payment reversals only under certain conditions:
- Unauthorized transactions. The customer claims they didn’t authorize the purchase.
- Billing errors. The charge was duplicated, incorrect, or charged in the wrong amount.
- Fraudulent activity. The purchase was made under false pretenses or through deception.
- Failure to receive goods or services. The item was never delivered, was defective, or didn’t match the description.
In many cases, banks default to protecting the consumer, especially when fraud is alleged. However, with wire transfers, often considered final and irreversible, the rules are more complicated and the reversal takes more time.
Read more: Robert Kiyosaki warns of a ‘Greater Depression’ coming to the US — with millions of Americans going poor. But he says these 2 ‘easy-money’ assets will bring in ‘great wealth’. How to get in now
Some banks will allow customers to file a complaint and launch an investigation, especially if they claim they were defrauded or coerced into making a purchase.
If the bank believes the customer acted in good faith, it may choose to reverse the charge, even if the merchant did nothing wrong. That’s what makes this type of situation so frustrating for business owners.
What to do if your business falls victim to this scam
Once a bank reverses a wire transfer, it’s tough to undo. So be proactive. If a bank contacts your business about potential fraud, respond promptly. Providing proof, such as receipts, can help your case before the funds are reversed.
After funds are reversed, you still have a few options:
- Dispute the reversal. Provide documentation showing the customer authorized the purchase and received the goods. This could include signed receipts, invoices, tracking data, or even video footage.
- File a police report. If the customer’s story involves criminal fraud, getting law enforcement involved may help clarify who’s actually at fault.
- Seek legal action. If the bank won’t reverse its decision, the business may consider small claims court or civil litigation to recover the funds.
- Consult with the bank. Each bank has its own internal process. Sometimes, escalating the issue to a higher level of review can change the outcome.
To avoid issues in the future, consider implementing more advanced due diligence processes for high-dollar sales — especially for gems and precious metals, which are frequently targeted in scams.
You can leverage technology in your business’s fight against friendly fraud. A number of companies offer AI-based fraud prevention software, including Signifyd — designed to protect online retailers — and Arctic Intelligence.
Arctic Intelligence advises training staff to identify questionable purchases. They should ask for proof of the source of funds for any big transaction, particularly with a new client, and report suspected money laundering to law enforcement. [2]
What to read next
- The ‘Oracle of Wall Street’ who predicted 2008 crash sees trouble in US housing — and says boomers aren’t as rich as many think. Why that’s a problem
- There’s still a 35% chance of a recession hitting the American economy this year — protect your retirement savings with these 5 essential money moves ASAP
- This tiny hot Costco item has skyrocketed 74% in price in under 2 years — but now the retail giant is restricting purchase. Here’s how to buy the coveted asset in bulk
- Want an extra $1,300,000 when you retire? Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Join 200,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
Article sources
At Moneywise, we consider it our responsibility to produce accurate and trustworthy content people can rely on to inform their financial decisions. We rely on vetted sources such as government data, financial records and expert interviews and highlight credible third-party reporting when appropriate.
We are committed to transparency and accountability, correcting errors openly and adhering to the best practices of the journalism industry. For more details, see our editorial ethics and guidelines.
[1]. Mastercard What is friendly fraud? [2]. Arctic Intelligence Case Studies: How organised criminals have exploited dealers in precious metals and stones to launder the proceeds of their crimes and how you can prevent this happening in your business
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.