Chargeback FactsThese 14 Chargeback Facts Will SHOCK You!

January 23, 2024 | 8 min read

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Chargeback Facts

In a Nutshell

Chargebacks, also known as customer disputes, are a federally mandated consumer right designed to protect credit card users. However, over the last 50 years, loopholes have allowed abuse of the system, leading to a rise in friendly fraud attacks. To help merchants better understand the causes, costs, and consequences of chargebacks, we've compiled a list of essential chargeback facts.

Startling Chargeback Facts That Expose the True Threat Posed by Fraud

Most merchants know that chargebacks are bad news. Few can fully understand how dire the threat really is, though.

Chargebacks — also known as customer disputes — are a federally mandated consumer right. The system was designed as a “safety net” to protect credit card users from fraud and unfair merchant practices. Disputes still fill that role, but there’s more to the story.

The chargeback process was introduced more than fifty years ago. Consumers have since found loopholes that allow abuse of the system. The result has been a sharp increase in the number of friendly fraud attacks committed over the last decade.

Reliable chargeback figures can be difficult to pin down, though. The knowledge merchants do have access to is often obscured by misunderstandings and misinformation. In response, we created this list of chargeback facts to help you gain a better understanding of the causes, costs, and consequences of chargebacks as they apply to your bottom line.

The Market Loses Billions to Chargebacks Each Year

You know merchants lose a lot of money because of chargebacks. Do you know just how serious the problem is, though?

FACT: Over 600 million chargebacks will be filed this year.

Mastercard reports that the global chargeback volume hit 615 million in 2021. With this being the case, it’s projected that merchants lost an estimated $117.47 billion to chargebacks in 2023.

FACT: Fraudsters deliberately target eCommerce merchants.

Scammers see card-not-present fraud as the “path of least resistance.” According to data from Insider Intelligence, card-not-present fraud will make up 73% of payment card fraud in 2024.

FACT: Chargebacks cost merchants more than 3.5 times their initial loss.

The cost of chargebacks balloons when we account for lost merchandise, added fees, and other costs. As a result, merchants will eventually lose $3.60 for every dollar they lost in terms of direct fraud costs.

FACT: Nearly one in four digital interactions is a fraud attempt.

According to Arkose Labs, 22.9% of all digital interactions recorded in 2020 were attempted fraud. And, according to Experian, accounts report significantly higher attack rates compared to previous years, with up to 1% of new applications being identified as fraudulent.

FACT: Three-quarters of chargebacks are probably friendly fraud.

Data from Visa suggests that 75% of all chargebacks are likely cases of friendly fraud. A third of consumers committing friendly fraud claimed non-delivery or damaged merchandise as the reason.

Friendly Fraud is the Main Problem

Chargebacks were meant as a consumer protection mechanism. But do you realize how often cardholders take advantage of the system nowadays? 

As alluded to above, friendly fraud is a fast-growing problem in the chargeback space. To get more insight, take a look at these stats uncovered by the 2023 Chargeback Field Report:

FACT: Cardholders find chargebacks “more convenient” than refunds.

Over three-quarters of surveyed customers freely admit to filing a chargeback strictly out of convenience. 72% of cardholder respondents saw no difference between chargebacks and merchant refunds.

FACT: Friendly fraud is a growing threat.

When asked if they had observed an increase or a decrease in friendly fraud over the last three years, nearly 75% of those who observed a change said friendly fraud instances had increased. The average respondent noted a 19% increase in friendly fraud.

FACT: More than half of chargeback filers ignore the rules.

Chargeback rules require the cardholder to contact the merchant and try to resolve the issue before calling the bank. However, 52% of cardholders admit to filing a chargeback without attempting any merchant contact.

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FACT: Most merchants still aren’t fighting back

Just 32% of surveyed merchants said they currently use an alert system to resolve disputes and prevent chargebacks from being filed, meaning two-thirds of merchants are not. This is despite the fact that merchants reported a 27% average reduction in chargebacks when they used alerts.

FACT: Successful friendly fraudsters will usually try it again.

Nearly 90% of respondents said successfully disputing a transaction would make them more likely to try it again. This holds, regardless of whether the cardholder had a valid reason to file that initial dispute in the first place.

Merchants’ Efforts Are Not Very Effective

A lot of merchants are working to address the problem. Unfortunately, in many cases, their efforts are not really paying off as well as they’d hoped.

FACT: A quarter of online businesses are in the chargeback “danger zone.”

Going back to the Chargeback Field Report, the average respondent had a chargeback rate of 0.56%. At the same time, nearly one in four respondents had a chargeback rate that exceeded 1% of transactions.

FACT: Some prevention efforts cost more than they save.

False declines — orders rejected for possibly being fraud — cost merchants nearly $443 billion every year. That number far outweighs the actual financial impact of credit card fraud.

FACT: DIY chargeback responses recover less than 20% of disputed transactions.

On average, merchants responded to 53% of chargebacks in 2023. Of those responses, roughly 52% were successful. However, if we remember that three in four chargebacks are friendly fraud, that means merchants are still leaving significant money on the table.

FACT: Common prevention efforts can cut disputes by 15-20%.

Merchants reported an average 19% reduction in chargebacks using solutions like Ethoca Alerts or Verifi CDRN. Respondents also claimed up to a 27% reduction in chargebacks using automated network inquiry programs such as Order Insight and Consumer Clarity.

Can Anything Be Done?

Merchants are usually quick to take action against criminal fraud…but much slower to act in cases of friendly fraud. In fact, many merchants go so far as to dismiss chargebacks as an unavoidable cost of doing business. But criminal fraud and friendly fraud have the same basic consequences for your operations.

Cardholders have learned to conceal friendly fraud by falsely claiming that disputes are based in criminal fraud. For example, they may report that a new TV was damaged upon delivery when, in reality, the item arrived in perfect condition.

This difference between the given reason for a dispute and the real reason makes identifying friendly fraud difficult. Merchants typically have limited data insight. They often deploy the wrong prevention tools or rely exclusively on one solution to handle multiple types of fraud.

The need for a multilayer fraud strategy has been obvious for years. The situation is now critical, though. The good news: adopting the right chargeback management plan has been proven to dramatically lower chargeback issuances and increase revenue.

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What are the risks of chargebacks?

Chargebacks pose risks to merchants as they can result in financial losses due to reversed transactions and chargeback fees. They also harm a business's reputation and may lead to increased scrutiny from payment processors. Merchants must manage chargebacks effectively to minimize these risks.

What are valid reasons for a chargeback?

Valid reasons for filing a chargeback typically include cases of unauthorized transactions, where a cardholder did not authorize a purchase, instances of fraud or identity theft, and situations where the purchased goods or services were not delivered or were significantly different from what was promised by the merchant. These reasons are generally accepted by card issuers as valid grounds for initiating a chargeback request. However, each card network and issuing bank may have specific guidelines and processes for evaluating chargeback claims.

What are the rules for chargeback?

Chargeback rules vary depending on the payment card network (e.g., Visa, MasterCard, American Express) and the specific circumstances of the dispute. Generally, cardholders are expected to first attempt to resolve issues with the merchant before initiating a chargeback. Time limits for filing chargebacks also exist, typically ranging from 60 to 120 days from the transaction date. Cardholders must provide evidence to support their claim, and the card issuer will then investigate and determine whether the chargeback is valid.

What are the conditions for chargeback?

A chargeback can typically be initiated by a cardholder when there is a dispute or issue with a credit card transaction, such as unauthorized charges, fraud, goods not received, or a significant discrepancy between what was promised and what was delivered by the merchant. To request a chargeback, the cardholder generally needs to contact their card issuer within a specific time frame, usually within 60 to 120 days of the transaction.

Can a chargeback get you in trouble?

Initiating a legitimate chargeback for valid reasons should not get you into trouble, as it is a consumer protection mechanism designed to address disputes and unauthorized transactions. However, misuse or fraudulent chargeback claims can lead to consequences, including being banned from making future purchases with the merchant or facing legal actions if it's determined that the chargeback was filed in bad faith.

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