The Chargeback Statistics Every Merchant Should Know
Chargeback stats can be difficult to pin down. Accurate, reliable information on the state of chargebacks is scarce. Plus, any information that’s available can be contradictory, making it hard to get a reliable picture.
What we do know: a changing marketplace and evolving technology led to a sharp increase in the number of friendly fraud attacks perpetrated by cardholders over the last decade. Then, Covid-19 came along and compounded the problem.
Now more than ever, merchants need to fully understand the causes, costs, and consequences of chargebacks. In this post, we’ll go over some of the general chargeback statistics we’ve been able to compile based on the 2021 Chargeback Field Report, along with other research. We’ll also provide a little context for what we see happening in the future to help you prepare for what’s ahead.
Understanding Chargeback Stats
Payment card disputes were intended as a “last resort” to protect consumers from criminal fraud and merchant abuse. eCommerce dramatically changed the way we shop, though, and the chargeback process has failed to keep pace. Deceitful or uninformed consumers turned chargebacks into a tool to commit fraud, rather than prevent it.
How big is this threat? It’s hard to say, exactly.
Obtaining an accurate view would require considerable input from banks, card networks, and merchants. Unfortunately, the parties involved tend to keep critical data to themselves. This is partly out of concern for security. However, a general lack of understanding in regards to the threat posed by chargebacks is a greater factor. Plus, many merchants simply don’t want to let people know that chargebacks are a problem for them.
This caution is not totally baseless. Chargebacks have a negative reputation, and businesses don’t want to be associated with them. The sad reality is that, even if these entities were willing to share information, few of them keep the kind of extensive records needed for a comprehensive view.
This lack of information creates a kind of feedback loop. The more the various parties try to control their data, the more they muddy the waters.
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Key Fraud & Chargebacks Stats Revealed
While a detailed consensus might not be possible, looking at raw figures offers some clues as to what’s happening. The following chargeback facts and dispute stats paint a stark picture of the current situation with regards to chargebacks, fraud, and the demands of modern, digital-enabled customers.
According to a study released by Juniper Research, eCommerce merchants stand to lose roughly $20 billion in 2021 due to criminal activity; an 18% increase over the $17.5 billion lost in 2020. This indicates that the rate at which the cost of online fraud grows is accelerating. Criminal activity is going to be more of a problem than ever for merchants over the next several years.
Fraud represents a substantial source of loss for merchants, but most merchants underestimate how much is really at stake. The cost of the individual transaction is just a fraction of the total cost of a single fraud incident. Merchants must consider the cost of the merchandise, overhead costs like shipping and interchange fees, plus chargeback fees assessed by the bank.
Fraudsters are opportunistic. They know that, as a merchant, there are numerous different challenges demanding your attention right know. In response, they're eager to take advantage of the present situation as an opportunity to commit more fraud than ever in 2021. Unfortunately, as the data above suggests, they stand a good chance of success right now, which will only contribute to the problem moving forward.
The average US retailer now sees 1,740 fraud attempts each month. Unfortunately, just a little over half of these attempts will be successful. 2021 marks the first year in which successful fraud attempts have overtaken those prevented.
Chargebacks have been a fast-growing problem for years. They’re something that no merchant—regardless of size or product vertical—can afford to ignore, considering the volume of chargebacks that will be filed by cardholders this year. Even if we assume that chargeback volume remains static over the next two years, current data suggests that global chargeback costs may reach $117.47 billion by 2023.
It’s harder to verify buyers in a card-not-present environment because the merchant never comes in physical contact with the customer or the payment card used. This makes it very attractive to fraudsters; it’s easy to conduct fraud attacks and to conduct a high volume of them, in a short period of time.
As alluded to earlier, fraud is a serious matter that demands attention. However, the methods that merchants employ to identify fraud are causing a mind-boggling number of false declines. Merchants lose nearly $34 in sales due to false declines for every $1 in fraud.
Fraud costs are rising across the board. Criminals are targeting higher-ticket value items, to get more profit from their efforts. Plus, as we see with the LexisNexis Fraud Multiplier, the cost of an individual fraud incident is more than three times the value of the initial transaction.
Some consumers commit friendly fraud unintentionally. They may genuinely misunderstand the chargeback process, and dispute a charge without knowing the consequences of their actions. Other consumers do it on purpose, though. This is a practice sometimes known as “cyber-shoplifting;” as we see above, many consumers engaged in the practice last year. This may have been the result of economic uncertainty or other factors related to the pandemic.
Return fraud is a major source of loss for merchants. However, it tends to go unaddressed, as merchants often fear that the cardholder will simply turn around a file a chargeback if their return request is not honored.
What Role Does Friendly Fraud Play?
The fraud and chargeback statistics outlined above illustrate that chargeback claims are on the rise. However, they give few clues as to where those claims actually originate. As it turns out, much of the blame can be linked to chargebacks filed for illegitimate reasons. This is a practice commonly referred to as friendly fraud. The chargeback stats we see below will illuminate the problem:
Friendly fraud is easy to perpetrate. That’s part of the problem; once customers realize they can abuse the process and file chargebacks to recoup their money and face no consequences, they will typically do it more and more.
As we see in this chargeback stat, there’s a significant disconnect with merchants on the topic of friendly fraud. Although friendly fraud already represents a majority of chargebacks, merchants still attribute more chargebacks to criminal activity than to deliberate abuse. This is a serious matter; if merchants can’t recognize genuine chargeback sources, they can’t deploy the necessary solutions to address the problem.
Many cardholders are unclear on the distinction between a chargeback and a refund. Also, most don’t understand the impact that chargebacks can have on merchants. It’s not uncommon for a cardholder to reach out to the bank to simply inquire about a transaction, only for the bank to proactively file a chargeback on the cardholder’s behalf.
Merchants are quick to take action against criminal fraud. However, they are much slower to act in cases of friendly fraud. This is despite the fact that criminal fraud and friendly fraud have the same basic consequences for merchants.
Why Does Friendly Fraud Happen?
The problem here is rooted in the chargeback system itself. The process still serves its purpose as a consumer protection mechanism but is easy to abuse. No one could have predicted how the eCommerce market would develop when they introduced the chargeback process back in the 1970s. As a result, cardholders can exploit loopholes to demand their money back without valid chargeback reasons.
Friendly fraud is first-person consumer fraud. Contrast this with criminal fraud, which is third-person criminal activity. Friendly fraud is easy to conceal by claiming that a transaction was the result of criminal fraud. This makes identifying friendly fraud difficult because merchants have limited data insight, and are forced to rely on faulty and unreliable reason codes.
There are only certain situations that warrant debit card chargebacks or credit card chargebacks. Cardholders frequently cite false or misleading reasons, though, in order to file an illegitimate claim. For example, a cardholder might claim that a product didn’t match your website description. This could be a legitimate claim; however, statistics show that it’s more likely to be a cover for friendly fraud. The cardholder may have just wanted to score a refund without having to pay return shipping or restocking fees.
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According to chargeback stats from the 2021 Chargeback Field Report, the majority of merchants acknowledge an increase in friendly fraud between 2018 and 2021. The average respondent noted an increase of 23%, but this figure might undersell the problem. As we noted above, it’s hard to identify friendly fraud, because it relies on hiding behind false reason codes.
The Covid-19 Connection
Nearly all aspects of everyday life were impacted by Covid-19, and chargebacks were no exception. Untold tens of thousands of stores globally were either shuttered, operated under limited capacity, or forced to expand customer purchasing options to stay afloat.
For many, the efforts paid off: in the first quarter of 2020, Walmart reported a 74% year-over-year increase in US-based eCommerce. eCommerce sales at Target surged 141% in the same period. Unsurprisingly, however, this led to a comparable rise in chargebacks and friendly fraud.
Fraudsters are highly opportunistic; they will look for chances to leverage any development in technology or circumstances to their benefit. Fraudsters jumped on Covid-19 immediately, recognizing it as an opportunity to take advantage of businesses and consumers. The Chargeback Field Report shows that nearly 70% of merchants reported an uptick in chargeback rates due to Covid-19.
This makes sense for several reasons. In addition to opportunistic criminals, merchants also had to contend with bored cardholders who made impulse buys, then experienced buyer’s remorse. Other consumers who suffered a loss of income might have tried to return expensive purchases after the return period expired.
Overall, most merchants feel friendly fraud and other fallout from the pandemic will continue to be major concerns going forward. It’s no surprise that the majority of survey respondents said they have a negative outlook for the rest of 2021.
Card-not-present transactions inherently carry greater chargeback risk. These chargebacks can be genuine, as well as fraudulent. With more people shopping at home during the pandemic lockdowns, it’s no surprise that friendly fraud activity surged.
Opportunities for Merchants
Chargeback issuances have continued to climb each year since 2014, and all indications suggest this pattern will continue. However, the situation is far from hopeless, as the following chargeback stats illustrate.
A merchant’s net recovery rate refers to the rate at which the merchant successfully re-presents transactions as a share of total chargebacks. This number is very low at present; representment is a difficult and time-consuming process, and merchants often allow chargebacks to go unchallenged when they could be overturned.
Working with a third-party chargeback management service can allow merchants to recapture revenue that would otherwise be lost. Chargeback Field Report respondents that employ a third-party chargeback management solution reported a net recovery rate 30% higher than those who managed disputes in-house.
Nine in ten respondents claimed that friendly fraud was a concern for their business. However, only 29% of respondents said they are successfully addressing the issue:
It’s possible that merchants simply don’t know which steps should be taken to mitigate friendly fraud. That said, it’s telling that merchants who recognized friendly fraud as a major concern were more likely to turn to a third-party solution.
Chargeback alerts are a go-to solution for many merchants. They allow merchants to intercept disputes before they progress to the chargeback stage. The merchant can then refund the transaction and avoid a chargeback. This is a valuable asset; however, it should be seen as more of a stop-gap measure; long-term chargeback prevention is the goal for which merchants should aim.
The need for multilayer fraud management has been obvious for years. Now, though, the difference is impossible to ignore. Merchants who invest in best practice, multilayered solutions that are integrated with cybersecurity and digital experience operations experience a 71% lower volume of successful fraud attacks. They also enjoy a 12% lower overall cost of fraud. It's no surprise, then, that the average US retailer deploys 8 fraud prevention solutions during a typical transaction.
The metrics which merchants employ to gauge success are important. Tracking the right key performance indicators (KPIs) is essential to give merchants the insight they need to make strategic decisions and allocate resources effectively. Otherwise, they’re simply “flying blind,” and guessing as to how to fight back against fruaud.
The Ideal Chargeback Stat: Zero
Ideally, the best chargeback statistic merchants could hope for is zero…as in, no chargebacks at all.
That may never be achievable, as there’s no way to guarantee against the occasional oversight or misstep. However, adopting the right chargeback management strategy has been proven to dramatically lower chargeback issuances. This translates to increase revenue, and is a positive indicator for the long-term success and sustainability of the business.
The industry overall needs a more comprehensive data model to serve as a basis for long-term, positive change. Until that happens, however, the only thing merchants can be sure of is that chargebacks—and the resulting revenue loss—will become more and more of a threat.
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What are chargeback stats?
Chargeback stats—short for chargeback statistics—refers to any facts, figures, or related data pertinent to issuing, receiving, or fighting chargebacks.
What chargeback stats are available?
Not many, unfortunately. There is limited published information regarding chargebacks and friendly fraud. This contributes to a general lack of understanding and consensus on the topic.
Why are chargeback stats important?
A solid understanding of your own chargeback situation—as well as the state of chargebacks in general—can be useful. Understanding chargebacks is necessary to develop a chargeback management strategy to increase revenue, build brand loyalty, and achieve long-term sustainability.
What percentage of chargebacks are successful?
Merchants report a 12% net recovery rate, which is the rate at which their chargebacks are successfully represented as a portion of total chargebacks issued.
Do merchants fight chargebacks?
Not enough. Although merchants contested 43% of chargebacks, most lack the necessary data insight to successfully complete the representment process.