Curbing chargeback frauds

Monica Eaton at Chargebacks911 discusses how retailers can curb the growth in chargebacks and the fraud associated with them

 

Non-criminal chargebacks are expected to cost merchants more than $100 billion in 2023 alone.

 

According to internal reporting from Visa, friendly fraud accounts for up to 75% of all chargebacks. This means only a small portion of overall chargebacks is made up of third-party, or “criminal,” fraud while the rest can be traced to errors, miscommunication, or deliberate misuse of the chargeback process.

 

It’s clear that chargebacks are costly and businesses want to limit—and ultimately avoid—them. Therefore, it is essential to explore whether the payments industry has made chargebacks too easy for consumers to initiate, as well as how merchants can be educated on the need to be more vigilant in their efforts to address and respond to chargebacks.

 

In doing so, we can all help influence positive, fair and balanced change when it comes to transaction disputes and chargebacks. 

 

Are chargebacks too easy?

Has the payments industry made chargebacks too easy for consumers? In 2022, shoppers lost $5.8 billion to fraud, a 70% increase from 2020. As a protection mechanism, chargebacks allowed consumers to reclaim at least part of this staggering figure, albeit at the expense of the merchant.

 

However, criminal fraud is only one reason for a consumer to dispute a transaction with their issuing bank. Chargebacks can be utilised by consumers for when products don’t arrive, when they arrive broken or not as advertised, or when a merchant’s customer service fails to address a customer’s problem, among other reasons.

 

Some consumers also use chargebacks to cancel recurring payments, such as media subscriptions, rather than go through the cancellation process with the retailer, often characterised as first-party misuse.

 

Initiating a chargeback is fairly simple: call your card provider and tell them you suspect a charge on your card is fraudulent or invalid, and the likelihood is that it will be refunded, oftentimes instantaneously or within a few days.

 

Consumers don’t need to collect evidence that any given charge is fraudulent or that an item didn’t arrive – the transaction is simply reversed, penalties and fees are assessed, and the card network and banking institutions will establish the facts afterward. 

 

With the current guilty-until-proven-innocent chargeback process, it is easy to see how chargebacks may favour consumers and how this process, often unintentionally, can become the target of abuse.

 

Tackling friendly fraud head on

So how can businesses decrease the likelihood of frivolous or invalid chargebacks, aka “friendly fraud”? Being easily accessible to consumers, analysing transaction data, implementing a chargeback alert system, and communicating throughout the process with banks and processors are all viable means of helping to thwart this growing trend. 

 

When it comes to understanding the source of the problem, card-not-present transactions are most at risk, with studies showing a sale made online is 50 times more likely to fall victim to friendly fraud than instances where the cardholder is physically present.

 

Best practice measures to help mitigate these occurrences is not only recommended for faceless transactions, but vital.

 

Firstly, merchants should provide customers a clear and easy-to-understand return policy, as well as a customer service system that makes it easy for shoppers to contact your business with any questions or concerns. Different industries will need different policies, but being seen as easily accessible to the customer will encourage them to resolve disputes with you rather than their issuing bank.

 

As a rule of thumb, if you are open for business, you should be open to serve your customer.  Whether this is through chat, email or traditional phone support; ensure your customers are aware of how to get in contact with you if they have any query or issue.

 

Secondly, engage in a routine and timely response to each and every chargeback received.  Whether the chargeback is valid or invalid, investigating each case is paramount.  For merchants who struggle with the short timeframes and manual processes, there are chargeback management solutions that can dramatically improve efficiencies.

 

Utilising tools to help manage these tasks ensures merchants can access and attribute valuable feedback, helping retailers make better business decisions and ultimately improving the customer experience.

 

Thirdly, merchants can subscribe to pre-chargeback notification systems, which may provide an opportunity to resolve disputes before they become chargebacks. These solutions allow merchants to receive information about new dispute claims, which they can proactively address with a prompt response.

 

Feedback is crucial in this process, especially considering the vast majority of friendly fraud chargebacks are unintentional fraud claims—simply because the consumer didn’t recognise the description of the charge on their card statement or banking app.

 

By corresponding and exchanging information, whether it’s acknowledging the chargeback or providing the bank with feedback on a mistake made by the consumer, banks and businesses can work together to paint a more accurate picture of friendly fraud that will help propel the payments industry in the right direction.

 

The bottom line

There’s one commonality in each of these friendly fraud management strategies, and that’s the sharing of pertinent data. Automated anti-fraud systems rely on what data they can find, which may be thousands of individual signals, but can never be complete.

 

Similarly, in chargeback processes, incorrect decisions can happen because of missing information. For example, invalid chargebacks could stem from individual customers not being able to see that their order hasn’t arrived yet or not being able to identify a charge on their card, and at a higher level, chargebacks can sometimes not be challenged effectively because of a lack of feedback from both customers and payment schemes.

 

Most of the work of processing chargeback claims has now been delegated to automated systems, and that is unequivocally a good thing.

 

However, the flipside is that technology systems are only as good as the data that is available to them. The industry requires new technology that helps exchange data to close informational gaps, making payments faster, easier, more secure and more transparent.

 

Both consumer behaviours and technology are constantly evolving, which means new and rising chargeback threats appear daily. Businesses need an effective chargeback management strategy that is flexible enough to identify new trends and techniques, adapt to new technology or threats and change with the ever-evolving landscape that is the payments industry. Combined, this can help curb the rise in chargebacks and the impact on businesses themselves.

 

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Monica Eaton is Chief Information Officer of Global Risk Technologies and the Founder and CEO of Chargebacks911, a company fully dedicated to mitigating chargebacks and eliminating first-party fraud and misuse, and Fi911 which provides support to financial institutions, streamlining and automating chargeback management

 

Main image courtesy of iStockPhoto.com