The 2023 Chargeback Field Report

Introduction: Methods and Data

Based on surveys commissioned by Chargebacks911®, the 2023 Chargeback Field Report offers retailers, financial institutions, and other stakeholders a cross-view of the current state of chargebacks. This study highlights current fraud trends, highlighting key pain points for retailers in general, and eCommerce merchants in particular.

Surveys conducted to prepare this report included respondents from businesses of all sizes, primarily within the card-not-present (CNP) payments space. Our primary goal was to assess chargebacks from the merchant’s perspective. That said, we also conducted a complementing survey focused on consumer insights. Data from these surveys were also included in the report.

We went to great lengths to keep the sample set as random and representative as possible. The survey participants represent multiple industries, scales, and chargeback risk levels. While focused on CNP merchants, the survey was designed to be diversified to generate the most accurate information.

That said, this is by no means a comprehensive report: the survey was voluntary, which limited the sample group. While offering significant advantages, this approach also presented certain drawbacks. A survey-based report, for example, necessarily relies on self-reported data. The person completing the survey would often have limited access to some (or all) of the data requested, and would thus be offering impressions based on sentiment, rather than hard data.

Along the same lines, certain participants will undoubtedly be more forthcoming and proactive toward chargebacks. Those willing to participate in this type of survey were likely to be more familiar with their chargeback situation, and thus provide more accurate details than a typical merchant.

Participants were also asked to provide approximate numbers if no specific data was available. This could also skew results; in our experience, merchants commonly underestimate the scale of their chargeback problem and overestimate the effectiveness of their management efforts.

Finally, not every participant answered every question. We’ve also rounded all percentages to a whole number for clarity and ease of use. These two factors may result in some totals being more or less than exactly 100 percent.

Key Takeaways

The majority of respondents reported an increase in incidents of first-party chargeback misuse (i.e. “friendly fraud”) over the past three years.

Despite Visa changing terminology, merchants continue to prefer the term “chargeback” when describing the payment dispute process.

Respondents estimated that first-party chargeback misuse (i.e. “friendly fraud”) was responsible for half of their chargebacks.

Merchants continue to be challenged by chargeback management complexities. The two most cited obstacles were “reducing overall chargeback rates” and “winning chargeback cases.”

Nearly a third of merchants do not represent illegitimate chargebacks. Concern about reputation was the number-one reason given for not refuting.

Participants estimated that nearly a third of their refunds were fraudulent.

A third of the cardholders surveyed report that they often found statement billing descriptors confusing or unrecognizable.

Nearly a third of merchants said that they were unsure how their charges appeared on their customers’ billing statements.

Cardholders consider filing a chargeback to be a valid alternative to seeking a refund, with more than half admitting to disputing a charge without first contacting the merchant.

Demographics & Sample

Annual revenue from card-not-present transactions

Enterprise ($100M+) Small Business (Less than $10M) Mid Market ($10M - $100M) 35% 36% 29%

In terms of annual revenue from card-not-present transactions, companies participating in our survey were divided fairly equally: 36 percent were Small Businesses that reported yearly CNP revenue of $10M or less.

At 29 percent, Enterprise organizations (annual revenue of over $100M) made up a slightly smaller bloc. All other participants (35 percent) fell somewhere in between, identifying as “Mid Market” companies.

Over half of the companies surveyed reported having one or more chargeback risk factors. These are elements of the organization’s business model that have historically been shown to increase the risk of customer disputes or chargeback abuse. Examples include offering subscription services or free trial offers, or selling high-ticket merchandise.

Many of the merchants in our survey reported having more than one high-risk factor, whereas over a third of respondents said that none of the factors applied to them.

Which of the following chargeback risk factors apply to your business?

20% 34.9% 38.3% 16.6% 36.6% Subscription billing High-Value Industry or Product Category Affiliate marketing Free trial offers None

Participants’ current representment solution

Third-party solution Unknown Only in-house 63.3% .7% 36%

We sought to understand how respondents were currently managing chargebacks. The majority of participants said they managed their chargebacks in-house. Respondents from larger organizations (+50M annual online revenue) were twice as likely to use a third-party solution of some type as smaller merchants.

A third of the organizations handling chargebacks in-house did so through a dedicated chargeback team. A similar percentage assigned chargeback management-related tasks to their accounting or finance department. Another 21 percent used their operations department.

Department responsible for chargeback management

35% 33% Accounting/Finance Operations Dedicated team Loss prevention 21% 3% 3% Customer support 5% Other

Besides credit cards, we asked about the payment methods merchants currently accept. The majority of the respondents claim to be offering the option to pay with ewallets, like Paypal or Google Pay. Studies show that an increasing number of consumers are reportedly insisting on alternative payments options.

Merchants, however, are looking at the situation from a different perspective: nearly 40 percent of respondents felt that offering non-traditional payment channels increased the risk of fraud. Only 16 percent believed doing so decreased fraud risk.

Alternative payment methods accepted

53% 45% 23% Gift Cards ACH eWallets BNPL P2P Crypto 4% 14% 16%

The State of Chargebacks

The representment process is in no way designed to limit the consumer’s ability to dispute invalid payments. In the US, the right to dispute transactions is protected by Federal law.

Unfortunately, survey results suggest that the majority of customer disputes are, in fact, illegitimate, with a high number of disputes claiming either identity theft or stolen card.

It is not uncommon for cardholders to accidentally file chargebacks on legitimate transactions, simply because they don’t recognize the transaction description. Merchants responding to the dispute through representment help make the consumer aware of their innocent mistake – and hopefully, prevent similar incidents in the future.

We’ll preface our findings by saying that chargebacks are an important consumer protection mechanism, and they fill a valuable role in the payment process.

The chargeback system was designed to protect customers against criminal fraud, merchant abuse, and other issues. They’re generally considered a necessity to ensure that customers are not held liable for transactions they did not authorize, or are charged for items they did not receive.

That said, cardholders are known to abuse the process. Illegitimate payment disputes may be filed by mistake, or by cardholders deliberately abusing the system. These disputes are known as both “first-party misuse” and as “post-transaction abuse,” or more colloquially, as “friendly fraud.” A serious threat to merchants, friendly fraud accounts for the bulk of reported chargeback volume, as seen in this report’s more detailed findings.

The representment process gives merchants the right to respond to chargebacks by presenting documentation on the underlying transaction which is also known as compelling evidence. If information in the representment document remedies the original claim from the consumer or their bank – whether by mistake or otherwise – the merchant is able to reverse the initial chargeback sale debit and recover revenue that would otherwise be lost to an invalid dispute. But, if the cardholder disagrees with the decision, or provides additional evidence or claims, then their bank (the issuer) may initiate a second-cycle dispute.

While we’re talking about disputes, it’s important to note that this report illustrates a variance in terminology. In 2018, Visa replaced the term “chargeback” with “dispute” in all official capacities. Five years on, acceptance of this change remains inconsistent. Other card networks have not adopted Visa’s labels, making it impossible for merchants to stick with one or the other term.

Terminology used to reference post-transaction fraud

50% 10% 20% 30% 40% 60% 2022 2021 2023 Chargebacks Both evenly Disputes

The percentage of merchants using the labels interchangeably has risen considerably since last year’s report. Unfortunately, this could lead to miscommunications, as the two terms may represent different things, depending on who is using them.

Outside the Visa network, “dispute” (or “customer dispute”) often refers to a customer arguing that a charge on their statement is invalid or in some way incorrect. A “chargeback” is one type of response to that dispute.

In almost all situations, filing a chargeback should be considered a last resort. Other responses to a dispute (contacting the merchant for a refund, for example) generally work better for all parties involved.

Merchant Chargeback Rates are Higher Than Last Year

Merchants continue to be challenged by chargeback management complexities. The two most cited obstacles were reducing overall chargeback rates and winning chargeback cases. Combined, those two factors made up nearly half of the top responses.

The third most cited challenge was identifying friendly fraud. Fewer than 8 percent of merchants worried about diagnosing internal issues that cause disputes. This is unfortunate, given that errors in merchant policies remain a leading cause of chargebacks.

Biggest challenge related to the representment process

Revenue recovery Identifying friendly fraud Reducing rates Balancing risk against false positives 2022 2023 5% 0% 15% 10% 20% 25% 30%

A substantial number of customer inquiries start with a cardholder not recognizing a charge on their monthly statement. Suspecting fraud, the customer calls the bank. This will typically result in a chargeback, even if the transaction was legitimate.

Confusing or apparently irrelevant billing descriptors cause more than their share of problems. A third of the cardholders in our survey answered “Somewhat Often” or “Very Often” when asked how frequently they found billing descriptors confusing or unrecognizable. Only 6 percent of consumers said they never experience this.

Cardholders who say they’ve been confused by billing descriptors

32.1% 25.6% Often Rarely Sometimes Never 36.8% 5%

A coded billing descriptor may work fine for the merchant but could make it hard for the cardholder to identify the transaction. The cardholder may end up contacting their bank to inquire about the charge as a result, opening the door for a chargeback.

The merchant can easily remedy this situation, yet nearly a third of respondents did not even know how their billing descriptor appeared on their customers’ statements. Only half reported having ever modified a descriptor to more clearly represent their organization.

Merchants and billing descriptors

47.1% said they had never      checked their         descriptor  don't know how billing descriptor        appears 27.1%

Perhaps the best measurement of merchants’ chargeback issues can be found by examining respondents’ chargeback rates (also known as a “chargeback ratio” or “chargeback-to-transaction ratio”). Chargeback rates do not measure the amount of issues that stem from legitimate transactions, but rather the total sum of chargebacks that were filed against the merchant in a given month.

A chargeback rate, therefore, is a metric that compares a merchant’s total sales against the number of chargebacks the business received during a given period. This is expressed as a percentage, and each card network limits how many chargebacks a merchant can receive before deeming intervention necessary.

As a rule, this number has historically been pegged at 1 percent of the total transactions, and 2 percent for international merchants.

Participants’ current chargeback ratio

.1% .5% .1% 1.5%   0.56% Average .83% More than 500 chargebacks per month        .35% Less than 10 chargebacks     per month

The number of chargebacks received played into the calculations as well. Those receiving more than 500 chargebacks per month saw their chargeback rate jump to 0.83 percent. Not surprisingly, merchants with fewer than ten monthly chargebacks had a lower rate; at 0.35 percent, however, this number was still higher than expected.

Offering free trials and subscriptions raised the average chargeback rate to 0.68 percent. It’s also interesting to note that, even among retailers with no inherent risk triggers, the average reported chargeback rate was still over 0.5 percent.

As with other statistics in this report, it’s important to remember that many respondents reported having more than one chargeback risk factor.

Merchants Less Worried About Criminal Fraud

When asked to estimate what percentage of their chargebacks were caused by criminal fraud, the average response was 18 percent. Over half of respondents reported that fewer than 10 percent of their chargebacks were caused by criminal fraud. This is in line with recent data published by Visa, which suggests that 75 percent of all chargebacks issued in 2022 were cases of first-party misuse, rather than true criminal fraud.

There was a surprising degree of consistency in the numbers when segmenting merchants based on annual revenue. The average percentage of chargebacks believed to be caused by criminal fraud was lowest for companies with $1M or less in annual revenue. However, this is likely due to receiving fewer chargebacks overall:

Estimated criminal fraud based on annual revenue

10% 20% 30% Less than $10M More than $100M $10M - $100M    18% Average SHOP