The Top 10 Chargeback Reasons: Why Do Cardholders File Disputes in the First Place?
A chargeback can occur when a cardholder disputes a payment card transaction and asks their card-issuing bank to reverse it. It’s an important consumer protection mechanism for credit and debit card transactions
Chargebacks guarantee that a cardholder can retrieve funds lost to fraudsters, identity thieves, or other unauthorized uses of their account. Chargebacks also incentivize merchants to be on their best behavior.
All that aside, disputes can happen for a variety of reasons, and chargebacks are not always filed for the right reasons.
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Consequences of Chargebacks for Merchants & Cardholders
Chargebacks can be a serious loss source for merchants. Not only does seller lose the funds from a legitimate sale, but they are also on the hook for chargeback fees, fulfillment and shipping costs, and also the cost of any materials.
Merchants aren’t the only ones who suffer for illegitimately filed chargebacks, though. Like we alluded to above, chargebacks sometimes get filed without a valid reason. Consumers who leverage their right to a chargeback without legitimate cause may find themselves in trouble.
If the merchant is able to prove that the original transaction was legitimate (a process called representment), the cardholder will lose their provisional refund. The buyer will also be responsible for bank fees and penalties. Additionally, disputes can take months to finalize, leaving both the cardholder and the merchant in limbo.
So all that being said, we have to ask: why do chargebacks even happen in the first place? What triggers a chargeback, and what can be done to prevent them from being necessary?
Let’s try to answer those questions by taking a closer look at the ten most common reasons for disputes.
The Top 10 Reasons Why Cardholders File Chargebacks
The chargeback triggers outlined below are pretty diverse.
Sometimes, the merchant really is at fault, and the customer deserves their money back. For example, maybe the merchant’s refund policy was unclear, or no one from their organization got back to the buyer in a reasonable amount of time. These could be considered valid reasons to dispute a charge.
In other cases, a customer may simply forget about a payment due date, or didn’t recognize the merchant’s billing details on their statement. In these situations, while miscommunication may be understandable, it doesn’t warrant a chargeback. In other instances, a cardholder could file an illegitimate dispute on purpose because they are angry, confused, or simply looking to get something for free.
Regardless of fault, knowing why a chargeback was filed and how to respond can be the key to a lower chargeback ratio, as well as lower fees and fewer account restrictions. To illustrate this, we’ll go over many of these reasons and provide some advice for merchants about how to mitigate losses with a few best practices.
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The buyer is trying to get something for free
A growing number of chargebacks happen because consumers ignore return policies, refuse to wait for refunds, or simply want to get something for free. This is a situation known as “cyber shoplifting,” and is an increasingly common practice for cardholders. Unscrupulous buyers have learned that they can abuse the chargeback process by making purchases and simply disputing them later.
3 Basic Reasons for Chargebacks
Those are just a few of literally dozens of potential chargeback reasons. That said, we should also discuss their root causes. Generally speaking, we can divide all dispute reasons into one of three main categories:
Baseline chargeback reasons will always fall somewhere between these extremes. Chargeback reason codes are supposed to help explain the cause of a chargeback. Unfortunately, they aren’t reliable enough or detailed enough to provide much valuable insight as to reasons for chargebacks.
Most Chargeback Reasons Fall in a “Gray Area”
As you might have guessed, there are some “gray areas” implicit in the dispute process that are not adequately accounted for by the convention industry understanding of chargeback reasons. For instance, there are no “friendly fraud” reason codes, because friendly fraud is predicated on hiding behind a false chargeback reason code.
Overreliance on reason codes is possibly the single most common chargeback management error. This is because most non-fraud chargebacks are not clear-cut cases of either criminal fraud, merchant error, or cardholder abuse. Rather, disputes tend to lie between these categories.
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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, disputes should be fought and overturned. However, there may also be things that a merchant can do to prevent disputes with similar stated chargeback reasons from occurring in the future.
Best Practices Can Help Prevent Chargebacks
Regardless of the reason for a chargeback, the simplest way to avoid problems is to deploy best practices to keep chargebacks from happening in the first place. Below are a few steps merchants can take to avoid customer disputes that result in chargebacks:
Whether or not a merchant already utilizes many or all of these best practices, they could still find themselves at the mercy of fraud and chargebacks. Disputes are a complex issue. They don’t have a “one-size-fits-all” solution, and what works for some merchants may not work for others.
This is why it’s imperative to not only have a fraud and chargeback prevention plan in place, but also to diversify those options as much as possible.
A Multi-Layered Strategy is Essential
Chargebacks have their place in commerce, and they aren’t going anywhere anytime soon. That said, the need for comprehensive fraud prevention isn’t going anywhere either.
What should merchants do to stay ahead of the curve? A multi-layered approach to fraud and chargebacks could be the best answer.
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What is a chargeback?
A chargeback is a credit or debit card charge that is forcibly reversed by an issuing bank. This typically happens after a cardholder claims a transaction was the result of fraud or abuse.
What are the three sources of chargebacks?
Generally speaking, all dispute reasons stem from one or a combination of three main sources: merchant error, criminal fraud, or friendly fraud.
What are common reasons for chargebacks?
There are literally dozens of potential chargeback sources. Some of the most common reasons for chargebacks include items arriving damaged or defective, merchants not providing the goods or services in a timely fashion, buyer’s remorse, and criminal fraud.
Are chargeback reason codes accurate?
No. Chargeback “gray areas” implicit in the dispute process are not adequately accounted for by current chargeback reason codes. Overreliance on reason codes is possibly the most common chargeback management error. This is because most non-fraud chargebacks are not clear-cut cases of either criminal fraud or cardholder abuse, but rather oscillate somewhere between the two.