There’s Nothing Friendly About Chargeback Fraud
"Fraud" is one of the most common reasons cardholders cite when filing a chargeback. But under the wide umbrella of true fraud hides a more sinister form of deceit: chargeback fraud.
What is Chargeback Fraud?
- Chargeback Fraud
Chargeback Fraud is when cardholders dispute a transaction with the bank instead of contacting the merchant for a refund. Sometimes called friendly fraud, it involves actual consumers abusing the chargeback process to secure a refund.
[noun]/* charj-bak frawd/
Despite the wide range of excuses people may use, there is an increasing likelihood that these sorts of claims are false and the intent dishonest. Why would a customer misrepresent a transaction? There are multiple potential reasons, including:
Reasons a customer would misrepresent a transaction:
- The cardholder’s actual intention was to get something free.
- The cardholder simply did not understand the process.
- The cardholder experienced buyer’s remorse, regretting the purchase but not wanting to confront the merchant.
- A family member made the purchase, but the primary cardholder either didn't know or simply didn’t want to honor the charges.
- The cardholder didn’t recognize the charge or forgot about making the purchase.
- The cardholder didn’t qualify for a traditional refund (for example, the time limit had passed).
Obviously, a certain number of claims filed will be legitimate, caused by merchant errors or criminal fraud. But the percentage of fraudulent chargebacks is growing exponentially each year.
The Challenges of Fighting Chargeback Fraud
More and more statistics back up the prevalence of chargeback fraud. So why isn't something being done to stop this epidemic? There are several reasons consumers continue to get away with fraudulent chargebacks:
Reason codes don't accurately describe the transaction dispute.
To file a chargeback, the cardholder must make a claim--in the case of fraud, a false claim--against a transaction. Banks assign a pre-defined reason code based on whatever reason the consumer provides for filing the dispute.
Many merchants simply accept the assigned reason code as truth, and therefore do nothing to try and identify the actual cause of the chargeback. Unfortunately, this leaves them with no effective defense against chargeback fraud. Fraudulent chargebacks are usually filed by seemingly satisfied cardholders. Merchants don't suspect that their customers are behaving dishonestly.
Worse, failing to challenge these illegitimate claims practically guarantees they will continue. Without the experience or expertise to recognize chargeback fraud, merchants won't enact any measures to prevent them. As a result, businesses lose revenue, give away merchandise, and pay steep chargeback fees.
Much of this could be reduced or even prevented if merchants knew what they were really up against. To do that, however, they would need a way to determine the true rationale behind the reason code.
Chargebacks are often easier than refunds.
A recent study found 81% of cardholders have filed a chargeback out of convenience. Rather than contact the merchant, they decided it was easier and faster to ask the bank for a "refund."
In today's busy society, consumers naturally gravitate towards the easiest and fastest option available. Many don't realize that a refund and a chargeback are not the same thing. They have no idea the extra burden they are putting on merchants.
Chargeback regulations are largely obsolete.
Chargeback regulations were developed in a pre-internet era. They were never designed to accommodate today's fast-paced, computer-driven marketplace.
Purchasing options and technologies change rapidly, and fraud tactics constantly adapt in response. Chargeback processing regulations, however, have not evolved at a corresponding pace; in many cases, they have not evolved at all.
Strategies of the past, no matter how effective they were at the time, aren’t able to address problems of the future. The imbalance between stagnant chargeback processes and innovative sales tactics is exacerbating the issue. If wholesale changes aren’t made to the payment industry, the problem will only continue to worsen.
Banks are unable (or unwilling) to perform due diligence.
Like any other business, banks are interested in appeasing their customers. So when cardholders file a chargeback, banks tend to automatically assume the customer is right. It's good for public relations, but unfair to merchants.
As the popularity of chargebacks has risen, however, so has the speed at which they need to be processed. Banks admit they are often understaffed in this area. This frequently results in chargeback claims not being fully investigated prior to sign-off.
Fraudsters are flourishing without consistent due diligence for all cardholder claims. Unfortunately, it's merchants who are bearing the chargeback costs.
Merchants lack the resources for fighting back.
Successfully managing chargeback fraud is a difficult task. Do-it-yourself risk mitigation requires a large investment, yet statistically offers a minimal chance of success. Faced with that, even merchants who suspect they are losing to chargeback fraud can begin to feel that the end doesn't justify the means. They incorrectly assume chargeback fraud is simply an unfortunate cost of doing business.
But ignoring fraudulent chargebacks can cause problems far beyond simple revenue loss. Failing to fight back can have severe, long-term repercussions. And it can do irreparable damage to a business' sustainability, as we'll see.
How Merchants Can Prevent Chargeback Fraud
Risk mitigation is always important. But when businesses are losing to their own customers, reducing fraud becomes an absolute necessity.
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Before attempting to fight fraud, however, merchants need to make their own procedures "chargeback-proof." What might appear to be minor missteps in a merchant's practices could be unknowingly triggering chargebacks. Merchants should consider a professional evaluation of current business practices. This will often reveal multiple ways to close gaps leading to revenue losses.
Additionally, there are a number of "best practices" that all merchants should implement:
The Importance of Representment
Fighting chargeback fraud through representment is important on many levels. For merchants, contesting fraudulent charges can recover revenue that would otherwise be lost. Perhaps more importantly, it helps preserve and protect the merchant's reputation, both with customers and with banks. Finally, on a larger scale, the very act of disputing illegitimate claims helps perpetuate industry-wide change.
Fighting back is important: every chargeback dispute merchants win puts money and/or merchandise back into their business. A win, however, doesn't take away the chargeback fees … so it's still better to prevent chargebacks whenever possible.
This can be more difficult than it sounds. There is a vicious cycle that occurs between the cardholder, the bank, and the merchant when it comes to chargebacks.
- The customer files the chargeback, which in effect is accusing the merchant of behaving inappropriately.
- Banks lack the resources to perform intensive due diligence on every cardholder claim. It's easier and faster to simply take the claim at face value.
- Merchants don’t appeal cases because they assume the bank won't respond.
- The customer gets away with a chargeback and is highly inclined to try it again.
- The banks see another chargeback for the same merchant and thinks "Well, they didn't fight the last one (or two, or ten), so they're probably at fault, like the customer says…".
- The merchant begins to believe nothing can be done about chargebacks and is even less inclined to try disputing the claims …
…and the cycle snowballs.
Should Merchants Fight All Chargebacks?
Each chargeback filed against a merchant implies the merchant is at fault. It's human nature to believe that innocent merchants would try to defend themselves. If they don't fight back against illegitimately filed chargebacks, their inaction can be like an admission of guilt.
Undisputed claims become part of the merchant's record, which makes it that much easier for the bank to accept the next chargeback filed with that merchant at face value. In fact, every chargeback that follows will potentially receive less due diligence. It will also likely damage that reputation further, and the problem will grow.
That's why it's essential for merchants to fight 100% of their fraudulent chargebacks. This may seem to defy logic, given the cost of representment. But the bank doesn’t see representment as a cost vs. benefit analysis; to the bank, it is an issue of fault or error. As far as the issuer is concerned, if the merchant only occasionally disputes chargebacks, the merchant is only occasionally blameless.
How Merchants Can Fight Back
There's no real way around it: chargeback fraud is flourishing.
It's easy to see why. At last count, more than 70% of American families have at least one credit card. The widespread growth of the internet has dramatically increased card-not-present transactions. At $394.86 billion, eCommerce represented 11.7% of total sales in 2016.
The rise of online sales has led to a corresponding jump in fraud. A study from 2016 reports that merchants pay $2.40 for every $1 lost in fraudulent transactions, and that number goes up every year. This is NOT an issue merchants can afford to ignore.
Take Action Now…Before It’s Too Late
Chargebacks have become an easy solution with instant gratification. However, with a foundation of business best practices, merchants can challenge chargebacks with confidence.
Take action now. The technology and capabilities to successfully refute chargeback fraud are available. Merchants must stand up for their rights, however, or fraudsters will continue to steal revenue.
Fight back! We're happy to help. We'll provide the tools and strategies we've used to help merchants world-wide increase efficiency, reduce chargebacks, and recover revenue.