What are the Most Common Types of Chargebacks?
To prevent common types of chargebacks, the merchant’s best defense is to go on the offensive. Understanding chargebacks is the first step in preventing this loss of revenue and safeguarding the merchant’s ability to process credit cards.
The Three Sources of Chargebacks
Many merchants base their chargeback management around reason codes. Merchants analyze the reason code used for each individual chargeback and use this intelligence as the foundation for chargeback prevention and representment.
Unfortunately, reason code intelligence isn’t as helpful as it should be. Consumers have learned to exploit loopholes in the chargeback process and engage in friendly fraud. Inaccurate reason codes are used to disguise the real reasoning behind illegitimate chargebacks.
Rather than sort through hundreds of reason codes that don’t accurately explain the reasoning for the transaction dispute, Chargebacks911® has created a more efficient management system.
All merchants need to know is this: there are only three sources of chargebacks. All chargebacks fall into one of three categories.
Surprisingly, merchants themselves are one of the leading causes of chargebacks. Innocent mistakes and oversights can have a major impact on the business’s bottom line. Errors are commonly associated with merchant setup, transaction data, and order processing.
Unless the merchant is intentionally engaging in fraud, these inadvertent errors are easily preventable.
Merchant Error Prevalence
Based on data accumulated from the management of millions of transaction disputes, Chargebacks911 has discovered 20-40% of all chargebacks are caused by merchant error. With proper management, these chargebacks are preventable.
Merchant Error Solution
It’s possible to eliminate nearly all errors, but merchants will need some help.
Chargebacks911 uses a Merchant Compliance Review to detect and eradicate errors. A 106-point inspection of the business’s policies and procedures reveals areas of concern. After identifying merchant errors and strategizing the most effective way to eliminate those errors, merchants are able to close any loopholes in their chargeback management system.
Another source of chargebacks is criminal fraud; the cardholder claims the transaction wasn’t authorized. This chargeback trigger can result from various forms of criminal activity:
- A criminal finds a lost card
- The physical payment card is stolen
- Counterfeit cards are created with stolen account information
- Hacked account information is used to make card-not-present transactions
Criminal fraud is one of the primary reasons chargebacks, a consumer protection mechanism, were created.
Criminal Fraud Prevalence
Most merchants focus the bulk of their chargeback management on criminal fraud prevention. In reality, criminal fraud contributes to a very small percentage of chargebacks. Only 1-10% of all chargebacks are caused by criminal fraud.
Criminal Fraud Solution
With proper management techniques and access to essential tools, the risk of criminal fraud chargebacks can virtually be eliminated. Merchants need to use fraud filters and chargeback alerts.
Automated fraud filters screen each individual transaction, ranking the purchase according to the risk of potential fraud. Merchants have the option to manually review the fraud filter results and accept or deny transactions that have been labeled high risk of fraud.
Participation in chargeback alert networks allows the merchant to receive alerts when transactions have been disputed on the basis of criminal fraud. Notifications are sent by the customer’s bank, giving merchants the option to refund the transaction before the bank processes the chargeback.
Ideally, businesses would have few unsatisfied customers and those customers would contact the business directly with any complaints they may have. However, some consumers opt to use the bank as a middleman and file a chargeback instead of asking for a refund.
Since the merchant isn’t aware of any problems with the transaction, friendly fraud (sometimes called chargeback fraud) is perpetrated by seemingly satisfied customers. Most cardholders engage in friendly fraud without realizing the repercussions of their actions, while others intentionally engage in this cyber shoplifting.
To learn more about friendly fraud, check out our helpful resource.
The 2019 Chargeback Situational Field Report
The 2019 Chargeback Situational Field Report is a comprehensive report offering a cross-view of the state of chargebacks and chargeback management in card-not-present payments.Free Download
Friendly Fraud Prevalence
Friendly fraud is by far the most common type of chargeback. Friendly fraud triggers more chargebacks than the other two sources combined. At least 60-80% of all chargebacks are really cases of friendly fraud.
According to a recent Chargeback911 study, 81% of cardholders admitted to filing a chargeback out of convenience. It was easier to contact the bank for a chargeback than call the merchant for a refund.
Friendly Fraud Solution
A merchant’s chargeback management goal should be to minimize transaction disputes caused by merchant error and criminal fraud. Why?
Eliminating two of the three sources of chargebacks means the only task that remains is to dispute friendly fraud—and it’s possible to successfully win almost all friendly fraud representments.
Disputing all friendly fraud, regardless of the chargeback dollar amount or anticipated ROI, is a powerful chargeback management strategy. Issuing banks notice which merchants defend themselves. Receiving incessant representments from a particular merchant forces the bank to reevaluate the ease in which they file chargebacks and implement more due diligence.
An Example of How the Most Common Chargebacks are Easily Disguised
With the rise of criminal fraud, the odds of becoming a victim are increasing. To assure cardholders of their accounts’ safety, banks offer consumers zero-liability in the area of fraudulent charges. Consumers are aware of this protection and use it to their advantage.
When analyzing the reason codes used by banks to explain the transaction disputes, the most common chargebacks are those attributed to criminal fraud.
However, a deeper analysis reveals the true cause of chargebacks in the vast majority of situations is friendly fraud. This shows consumers have learned they’ll receive the least resistance from the bank if they claim the transaction was unauthorized—regardless of the real reason for disputing the purchase.
Friendly fraud is the most common type of chargeback, even if issuing banks’ reason codes would imply otherwise.
Fighting the Most Important Battles
It is easy to say chargebacks are caused by just three things. It is more challenging to determine which source is to blame!
Chargebacks911 uses Intelligent Source Detection™ technology to determine the true cause of chargebacks and create an effective management solution.
If you’d like to learn more about the common causes of chargebacks or our methods for managing them, contact Chargebacks911 today. We’ll conduct a chargeback analysis and show you exactly how much more you can save.