Should I Refund After a Stripe Early Fraud Warning?

The short answer: you are not required to, and it depends on what you would lose each way. A refund ends the risk of a fraud chargeback on that payment, at the cost of the sale. Waiting keeps the sale, at the risk of a dispute and its fee. This article lays out both sides; the decision is yours.

Key points

• An early fraud warning is the card issuer saying the payment may be fraud. It is not a dispute.
• Stripe: warnings "don't require any action or response from you."
• A full refund prevents the dispute. It does not erase the warning.
• Whether the goods have left your hands changes the sums.

What is an early fraud warning?

Stripe's definition: "Early fraud warnings (EFWs) are messages sourced from reports that card issuers on the Visa, Mastercard, and JCB networks generate to flag payments they suspect might be fraudulent." A typical cause is a cardholder telling their bank the card was stolen.

The report and the dispute are separate decisions by the bank. In Stripe's words, "the networks require issuers to report fraud, but that requirement doesn't affect an issuer's decision about whether to initiate a dispute."

What happens if I do nothing?

Sometimes nothing, and sometimes a fraud dispute. Stripe gives its own figure: "If you don't refund the charge, about 40% of Visa and Mastercard EFWs become fraud disputes (the rate varies by card network and payment amount)."

If the dispute comes, Stripe "debits your Stripe balance for the disputed amount plus a dispute fee", and you can respond. Stripe is frank about that category: "This is a difficult dispute type to win because in many cases the reason for the dispute is correct."

What does a refund get me, and what does it not?

The quotes are from Stripe's pages on preventing disputes, refunds and monitoring programmes. A partial refund is weaker: customers "can still dispute partially refunded payments."

How do the two cases compare?

Both orders are hypothetical.

An order awaiting shipment

A $140 order is paid on Monday. The warning arrives on Tuesday, before the parcel leaves.

• Refund and cancel: you keep the goods. You lose the sale and the processing fee on it.
• Ship and wait: if the bank is right, you lose the goods, the $140 and a dispute fee.

Here the goods are still yours to keep, which is the main thing a refund protects.

An order already delivered

The same $140 order, but the warning arrives a week after delivery.

• Refund: the goods are gone and so is the money. You avoid the dispute fee and the dispute on your record.
• Wait: if no dispute follows, you keep the $140. If one follows, you are out the $140 and the fee unless you win.

Stripe addresses this case directly: "if your product or service was irretrievable—for example, the product already shipped, or the service has already been used—it might make more sense not to refund, and to wait and see if it does turn out to be fraud." It also says: "You should immediately refund any payment you're sure is fraud (unless you're covered by some form of liability shift, such as with 3D Secure)."

What else should weigh on the decision?

• The size of the payment. Stripe's guidance: "Automatically refunding all EFWs regardless of the likelihood of escalation isn't a good strategy", and "it's likely not worthwhile to refund EFWs on charges more than 35 percent higher than your dispute fee."
• Your dispute rate. A merchant close to a card network's monitoring threshold has more reason to avoid each dispute than a merchant far from it.
• What you know about the customer. A long-standing customer with earlier undisputed orders is a different case from a new account. For some Visa fraud disputes, Stripe checks your transaction history for eligibility under Visa's Compelling Evidence 3.0.
• Whether you could prove the order was genuine. If you could not, a dispute is likely to be lost.

What does ChargePilot do with early fraud warnings?

On Stripe, when Stripe warns that a payment is likely fraud, ChargePilot refunds it before a chargeback is filed. The fee is $19 per warning refunded before it becomes a dispute. You pay only when a chargeback is actually prevented, never for merely receiving an alert.

That is a refund on every warning it acts on, which suits the first case above better than the second. If you would rather weigh each warning yourself, weigh that before you turn it on. Disputes on other card-network programmes are covered in our comparison of RDR and Ethoca alerts, and every price is on one page.

Questions and answers