Sarah Elizabeth
The chargeback process was originally designed to protect consumers, but it actually works just as hard to defend companies. In fact, many ecommerce businesses are surprised to learn that the Fair Credit Billing Act of 1974 offers them quite a bit of chargeback protection.
Back in the early 1970s, credit cards were considered novel. If a card was lost or stolen and unauthorized transactions were made as a result, it would be nearly impossible to determine who was responsible for the charges. The Fair Credit Billing Act of 1974 was enacted to solve that problem and increase credit card use. It introduced the chargeback process, which enabled banks to reverse unauthorized purchases made on a consumer’s credit card.
Today, consumers not only use their credit cards – they also use digital wallets, alternative payments, and payment arrangements such as buy now, pay later and similar programs. Consumers have also become savvier about the chargeback process – In some cases, they take advantage of the process through friendly fraud and chargeback fraud. This puts ecommerce businesses at a disadvantage, especially when customer experience and satisfaction can make or break a business’ success.
Let’s take a look at how that can happen.
Chargeback Fraud and Friendly Fraud Are on the Rise
According to estimates, ecommerce losses to online payment fraud were 1 billion U.S. dollars globally in 2022. They were expected to grow to $48 billion by the end of 2023. Of that amount, $4.8 billion was due to chargeback fraud and friendly fraud. And these totals are rising steadily as ecommerce increases in popularity.
With every dollar of fraud losses costing businesses an average of $2.40, it’s more important than ever for businesses to understand the subtle difference between chargeback fraud and friendly fraud and to learn how to defend themselves against these losses.
What is Chargeback Fraud?
Chargeback fraud occurs when a customer willingly and knowingly lies about a transaction. The customer makes a legitimate credit card purchase, receives the product or service, and intentionally files a chargeback through the credit card company with the goal of receiving a refund on the order and still keeping the product. Over 85% of chargebacks are fraudulent and about 40% of people who file one fraudulent chargeback are likely to file another within 90 days.
A shocking number of consumers consider chargebacks a legitimate form of political pressure and a way to dispute company policy and/or values. And 72% of cardholders considered filing a chargeback with their bank a valid alternative to requesting a refund from the company.
How Is Friendly Fraud Different?
Fraud isn’t always committed with the intention to get something for nothing. Sometimes the customer disputes (or files a chargeback on) a purchase because of a legitimate complaint about an order that doesn’t go as planned, for example:
- The customer forgot they made the purchase.
- Another family member authorized the purchase.
- The customer forgot they agreed to recurring billing.
- The customer misunderstood the business’s return policy.
Even though in these scenarios the transaction was perfectly legitimate, and the chargeback was not intentionally fraudulent, it’s still fraud and more common than you’d think. Friendly fraud affects over one-third of merchants globally, ranking it the second most widespread type of fraud. Friendly fraud now accounts for up to 75% of all chargebacks.
It’s difficult, if not impossible, for businesses to determine which customers are making an honest chargeback claim and which ones are trying to defraud the business. In the end, the result is the same: lost merchandise, lost revenue and an increased chargeback ratio.
Chargeback Reason Codes Can Help with Chargeback Prevention
For every chargeback, a card issuer assigns a reason code that clearly describes why the customer is challenging the transaction. Ecommerce businesses should review the reason codes attached to chargebacks to help them understand why a chargeback was filed and to understand what information they’ll need to dispute the chargeback.
Some reason codes are more frequently abused than others, which can be used in data analysis to understand fraud trends and activity. Identifying patterns helps prevent chargebacks – it also helps companies make a case when disputing a chargeback.
In April 2023, Visa issued a new rule – referred to as “Compelling Evidence 3.0” – which gives ecommerce businesses more options when presented with a chargeback. Specifically, the new rule can be used to reverse the transaction fraud status associated with Reason Code 10.4: Other fraud, card-absent environment, when the situation allows.
Essentially, the rule allows businesses to present at least two other undisputed transactions processed on the same card within the last 120 days. This is great news for companies that track transaction data because it can be used in the chargeback dispute process.
One last point to note on this: card issuers modify their reason codes and their rules, which means businesses need to keep of those changes or risk losing chargeback disputes.
Ultimately, there are measures and rights that ecommerce businesses can lean into for chargeback prevention under the Fair Credit Billing Act.
Understanding Chargeback Prevention Rights
Here are eight rights ecommerce businesses have to help them with chargeback prevention.
1. Customers Are Limited in Their Chargeback Amounts
The total amount of a chargeback can never exceed the original transaction amount, although they can include shipping and handling fees and surcharges associated with the original transaction. The issuer may file chargebacks for the full transaction amount, part of the transaction amount, or several partial chargebacks. Chargebacks may not be filed on the cash-back amount received from a debit card transaction.
2. Customers Must Try Dispute Resolution Before Resorting to Chargebacks
Many credit card issuers stipulate that customers must attempt to resolve the problem directly with the business before filing a chargeback. If the issue can’t be resolved, customers may need to prove their attempts at resolution — like e-mails or chat messages with the businesses — before the issuer will accept a chargeback.
3. Customers Can’t Return Items and File Chargebacks
If customers receive an order past the promised delivery date, customers must first attempt to return the product for a refund before they can file a chargeback. A credit card issuer must then wait 15 days from the date of the customer’s attempted return of a product before processing a chargeback (unless waiting exceeds the chargeback filing deadline). This gives ecommerce businesses a chance to make the transaction right and avoids letting the customer receive a double refund through a credit and a charge reversal.
4. Customers Must File Chargebacks Promptly
Most card issuers require customers to file chargebacks within a certain timeframe (generally between 60 and 120 days, although customers in the United Kingdom have up to six years under Section 75).
5. Businesses Can Accept Alternative Payment Options
To avoid chargebacks altogether, businesses don’t have to accept credit cards; instead, they might consider switching to alternative payment methods like Zelle, ACH or e-checks. Of course, not accepting credit cards may significantly reduce the number of customers who are willing or able to shop with you.
6. Businesses Can Request Product Returns
If customers initiate a return or a credit card chargeback, businesses have the right to send customers demand letters insisting they return the products received.
7. Businesses Can Take Advantage of Representment
Contesting a fraudulent chargeback through representment is likely a business’ most important right. While it takes time, effort and resources for businesses to successfully defend a dispute, it is possible for them to collect and present the compelling evidence needed for a ruling in their favor. By disputing chargebacks, businesses send a strong message to fraudsters and credit card issuers that they’re unwilling to accept chargeback fraud.
8. Businesses Can Implement a Fraud Prevention Solution
When financial and reputational losses become too big a burden to bear, businesses should consider investing in a robust fraud prevention solution that can help stop chargebacks before they happen and protect them in the event one slips through undetected.
How ClearSale Helps Ecommerce Businesses with Chargeback Prevention and Management
At ClearSale, we offer clients three options.
ClearSale Total Protection
For large businesses whose fraud teams have a good understanding of risk profile and goals, our Total Protection approach allows you to recoup a portion of any losses due to fraudulent transactions.
We’ll establish a Service Level Agreement (SLA) that specifies KPI thresholds related to fraud and chargebacks. And we’ll reconcile to those KPIs every quarter. If they aren’t met, you’ll receive a discounted invoice.
Companies that choose this approach aren’t directly reimbursed for chargebacks that may occur; however, they do benefit from our hybrid fraud prevention model that combines AI-enabled automatic approvals and contextual review by the world’s biggest and most experienced team of fraud experts.
ClearSale Total Guaranteed Protection
High-risk ecommerce businesses may choose our 100% guaranteed coverage approach to handling fraud-related chargebacks. This “Chargeback Insurance” guarantees that any approved transaction that turns out to be fraudulent and results in a chargeback will be reimbursed to you.
End-to-End Chargeback Management
Regardless of size, your ecommerce business may benefit most from comprehensive chargeback management that includes a chargeback reversal approach designed to recover financial losses.
With our acquisition of chargeback management provider ChargebackOps, we can offer companies chargeback mitigation and resolution services including:
- Training fraud analyst teams.
- Conducting data audits and gathering compelling evidence.
- Drafting timely responses to banks and card issuers.
Where it makes sense, this approach also offers ecommerce businesses operational insights that can help improve internal processes that may be contributing to fraud risk and subsequent chargebacks.
By choosing a customized chargeback management approach, ecommerce businesses can also breathe a little easier knowing they’re protected against the increase in fraud attempts and poised for long-term financial success. Contact ClearSale today to learn more about our chargeback services.
