Chargeback Reasons: Why Do Customers File Disputes?
Chargeback reason codes are meant to offer insight into why customers file disputes. This is because chargebacks have morphed into something completely different over the last few years. What started as a crucial element of consumer protection became a consumer-driven tool to commit fraud.
That’s not to say that chargebacks don’t still serve their original purpose. Unfortunately, the rise of eCommerce exposed loopholes in the system, creating new opportunities for fraudulent behavior. Ironically, a system designed to protect consumers from fraud has become an easy way for cardholders to commit fraud against merchants.
Merchants have tried to fight back against this threat to varying degrees of success. Most challenges tied to chargeback management, though, stem from one fundamental error. Specifically, the problem is that the merchants doesn't know the real reason the customer filed a chargeback. Without accurate data, merchants are just spinning their wheels. They're wasting time and effort fighting the wrong problem.
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The Myth of Reason Codes
Officially speaking, a merchant can tell the cause of a chargeback based on the chargeback reason code. These codes are a type of shorthand explanation for more detailed chargeback reasons. Sadly, these reason codes are vague (at best). At worst, they’re completely inaccurate and only serve to camouflage fraudulent intent.
In truth, there are only three reasons why chargebacks are filed:
Missteps on the merchant’s part that inadvertently trigger chargebacks.
Deliberate acts by outside parties to steal from consumers or merchants.
Consumer claims that are—intentionally or unintentionally—fraudulent.
Combined, these three reasons make up an entire range of potential causes. It's what we can call a “chargeback spectrum.”
The true cause behind a chargeback can fall anywhere along the spectrum. We have deliberate criminal fraud or merchant abuse on one extreme, and deliberate consumer “cyber-shoplifting” on the other. For more on the chargeback spectrum, download our free report, Beyond Reason Codes: Looking Deeper to Discover the True Sources of Chargebacks).
The baseline chargeback reason will always be somewhere between these two extremes. Unfortunately, reason codes aren’t designed to provide that level of detail.
To make matters even more confusing, there may be more than one reason behind a chargeback. So, if the reason code mechanism has no way to suggest this, how can merchants know what really caused a chargeback? Let’s take a closer look at the three sources.
Three Extreme Cases: Merchant Abuse, Criminal Fraud, & Cyber Shoplifting
True criminal fraud is the hardest for merchants to dispute because cardholders have done nothing wrong. Criminal fraud is one of the reasons chargebacks were developed in the first place. It can originate with a third party, or with the actual merchant. In either of these cases, the merchant can—and should—be held liable for the chargeback.
#1. Merchant Fraud
Merchant fraud (not to be confused with merchant error) is a deliberate criminal act against the consumer on the part of the merchant. Examples of criminal fraud caused by merchants include:
- Failing to ship a product or provide service after payment has been accepted.
- Selling a product as authentic, but delivering a knock-off or facsimile.
- Applying a larger tip to a restaurant bill than what was signed for by the customer.
If cardholders make purchases that turn out to be fraud on the part of the merchant, they are entitled to file disputes. This allows them to recoup their funds (and penalize the merchant) through the chargeback dispute process.
#2. Third-Party Fraud
There are multiple ways for third parties to commit a crime. In all cases, though, they involve the unauthorized use of the bank account or card information of another person. Examples include:
- A person finds a card lost by its owner, then uses the card to make purchases.
- A fraudster obtains a stranger’s bank account number and uses it to electronically transfer funds to a second account, accessible to the fraudster.
- Someone known to the cardholder finds a card unattended, writes down the information, and later uses it to make online purchases.
- Criminal enterprises methodically seeking and using the victim’s card data.
Despite the lopsided amount of media coverage it receives, third-party criminal fraud is actually the least-likely source of a chargeback. Our data suggest that less than 10% of all chargebacks are tied to genuine criminal activity.
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#3. Intentional Chargeback Abuse (Cyber Shoplifting)
Consumer chargeback fraud is the other extreme of the spectrum. Here, the cardholder files a chargeback on a purchase that was legitimately made, authorized, and received. Thus, the cardholder is the fraudster.
Intentional chargeback abuse (sometimes called “cyber shoplifting”) occurs when a cardholder authorizes a purchase and receives the product or service as described, but files a chargeback against the merchant illegitimately. Examples of this include:
- A consumer who overspends then experiences buyer’s remorse. By filing a chargeback claiming the purchase was unauthorized, the cardholder is able to regain the money spent while still keeping the merchandise.
- A married couple who share a payment card account, where one party disagrees with an authorized purchase made by the other party and claims that the charge was fraudulent.
- A cardholder who places an online order for a high-end item with the intention of claiming a problem or defect with the product. Even when the product arrives in perfect working condition, the cardholder files a chargeback and turns a profit.
Consumers who successfully perpetrate one of these schemes are likely to do it again. By fighting provable cases of friendly fraud, merchants both recoup some of their losses and send a proactive message to consumers and banks alike.
The Chargeback Grey Area: Accidental Friendly Fraud & Merchant Error
There’s a lot of space between those examples mentioned above. In a majority of cases, chargebacks fall somewhere in the middle; the “grey area” occupied by accidental errors, misunderstandings, and oversights.
Accidental Friendly Fraud
We want to distinguish deliberate chargeback abuse from other cases of so-called “friendly fraud,” though, as the latter often happens accidentally. Odd as it may seem, cardholders can commit fraud without even realizing it. Sometimes, simply contacting the bank to inquire about a transaction can start the chargeback process, whether the cardholder intended to do so or not.
If a customer files a chargeback on an authorized purchase, it’s considered friendly fraud. In the following scenarios, however, the customer may not be aware the charge is valid:
- A consumer authorizes a family member to make a purchase but forgets having done so by the time the bank statement arrives. Seeing what appears to be an unauthorized charge, the cardholder suspects fraud and files a chargeback.
- A merchant has a policy of not posting a charge until the order ships. This delay, however, causes the charge to show up a month after the initial purchase. Not recognizing the charge on that date, the cardholder disputes the transaction.
- A cardholder does not recognize what is actually a legitimate purchase, because the descriptor used on the statement features the company’s legal trading name instead of its identifiable brand name.
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Not committing fraud does not necessarily mean that merchants have no responsibility for their own chargebacks. In merchant error scenarios, neither the customer nor the merchant intentionally commits fraud. Instead, the merchant has made an error in conducting the transaction that caused a chargeback.
Additionally, merchant error scenarios usually lack a single straightforward chargeback reason: a multitude of directions could have led to the dispute. To illustrate this, let’s look at some reason code descriptions, plus some instances where those codes might be invoked.
Not as Described or Defective Merchandise: The customer believes that the goods or service were delivered in imperfect condition or under unsatisfactory terms.
- The customer has unrealistically high expectations.
- The merchant oversold the product, promising far superior appearance, performance, or quality.
- The customer misused the product or misinterpreted the advertisements and descriptions before purchasing.
- The product was actually defective upon arrival due to manufacturing or delivery mistakes.
No Authorization: The customer claims to not have officially agreed to the purchase or the terms of the sale.
- The customer believed they were purchasing a different product or service than what was bought and received.
- The customer accidentally clicked “Submit” for an eCommerce purchase, and the merchant completed the transaction using stored credit card information.
- The customer is unable to connect with a customer service agent to assist in dealing with a problem with the product or service.
Canceled Recurring Transaction: The customer felt scammed by the subscription-based recurring billing, believed the cancellation policy to be undisclosed or unclear, or claims to have previously canceled the service.
- The merchant did not fully disclose the cancellation policy or allow the customer to cancel within the allotted time frame.
- The customer did not believe cancellation was required because a second shipment was not specifically requested.
- The company purposefully disguised the terms of the free trial by reducing the font size, camouflaging font color, etc.
- The customer claimed to have canceled the subscription earlier but did not follow the specified policy.
- The customer actually did cancel the recurring subscription, but an error on the merchant’s end did not stop the next shipment from being delivered.
Most Fall in the Middle
There are three fundamental chargeback sources: merchant error, criminal fraud, and friendly fraud. As we can see, though, there is a lot of grey area in those distinctions. We can identify are a great number of possible chargeback reasons; many more than would be suggested by the number of chargeback reason codes.
Overreliance on reason codes is possibly the single biggest chargeback management error that merchants make. This is because most non-fraud chargebacks are not clear-cut cases of either criminal fraud or cardholder abuse. As mentioned above, most disputes exist somewhere along that spectrum between the two.
Consider this example: imagine a company sells a shirt online. The picture on their website shows the shirt in a soft, salmon color, but the shirt is actually closer to orange. The merchant has some culpability here, but disputing the charge is an improper response.
This makes matters very complicated for merchants. Extreme cases of fraud can be addressed or prevented, but those chargebacks in the middle typically do not have such clear-cut solutions. In most cases, those disputes should be refuted and overturned. However, there may also be things that a merchant can do to prevent similar chargebacks from occurring in the future.
Learn More About Chargeback Reasons
It’s true that chargebacks help prevent individuals and companies from scamming consumers out of their credit card information and giving them nothing in return. But to be fair, when it comes to chargebacks, the customer is not always right.
The three primary chargeback reasons all have different victims, making it harder to determine when to put up a fair fight in proving the validity of the sale. That’s why more and more merchants rely on Chargebacks911® to deal with the complicated regulations and stressful deadlines
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