Sarah Elizabeth
Chargebacks were initially established as a way to protect customers against losses from identity theft and unfair business practices. While these reversals of transaction funds may help protect legitimate customers who have become fraud victims, other individuals are taking advantage of this process, and it’s costing businesses big.
According to estimates, ecommerce losses to online payment fraud were 1 billion U.S. dollars globally in 2022, 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 their business against these losses.
What Is Chargeback Fraud?
Chargeback fraud occurs when the 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 full refund and keeping the product. In the end, the customer gets to keep the purchase and get their money back, while the business suffers serious losses.
And it’s more common than people think. Friendly fraud, also known as first-party misuse, affects over one-third of merchants globally, ranking this the second most widespread type of fraud. Friendly fraud now accounts for up to 75% of all chargebacks.
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 merchant.
How Is Friendly Fraud Different?
Fraud isn’t always committed with the intent to deceive or to get something for nothing. Sometimes the customer disputes (or files a chargeback on) a purchase by mistake. This “friendly” fraud can occur for a number of reasons, including:
- 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.
Although the chargeback may not be intentionally fraudulent, it’s still fraud and it’s no less expensive for the business than true chargeback fraud.
The Negative Effects of Chargebacks on Ecommerce Businesses
Whether a chargeback is due to friendly or chargeback fraud, the result is the same: Businesses are on the hook for:
- The lost revenue they would’ve earned on the sale
- The cost of the lost product
- Expensive chargeback fees and penalties
- The potential loss of their business accounts if their chargeback ratios are too high
- Reputational damage
With 65% of merchants reporting an increase in chargeback fraud in 2022, the risk of loss is high. And if that weren’t bad enough, consumers who file a chargeback are more likely to do it again – 40% will try it again within 60 days.
Unfortunately, fraudsters take advantage of a chargeback system that favors buyers over sellers. If businesses want to defend themselves against a chargeback, they must collect significant amounts of data — like proof of who owns the credit card, who placed the order and who received the products.
For this reason, businesses often simply accept fraudulent chargebacks rather than having to expend the time, money and effort necessary to challenge chargeback disputes successfully.
How to Dispute Chargebacks and Friendly Fraud
Every ecommerce business should have a strategy for winning chargeback disputes that include the following best practices:
Look for patterns: Reason codes help businesses understand why the chargeback was filed and the type of compelling evidence required for a successful chargeback reversal. Studying those codes can help businesses identify the transactions with the potential to affect their revenue, the codes their products or service line triggers most frequently, and which chargebacks are happening most often and when.
Prepare evidence: Businesses must submit “compelling evidence” to prove the validity of the transaction in question in the form of business records, such as sales receipts, order forms, tracking numbers, and a host of other information that companies should maintain and organize as a precaution. Be sure to learn the types of compelling evidence needed for your industry and the types of products sold: physical goods, digital products or services like travel.
Look for behavior patterns: Patterns, such as the same customer filing multiple chargebacks or specific addresses associated with multiple chargebacks, can bolster the case for fraudulent chargebacks. Not only can this help businesses detect potential fraud, but the data gathered may also be useful to submit to the card issuer as evidence.
Write compelling rebuttal letters: A carefully constructed rebuttal letter can help businesses win chargeback reversals. Here are some tips for constructing a compelling rebuttal letter:
- Be brief: No longer than one page.
- Stay objective: Stick with the facts, and stay focused on the goal – winning the chargeback reversal.
- Highlight specifics: Customize the rebuttal letter to each dispute, and focus on the evidence being submitted.
Adhere to response timeframes: While card issuers give customers considerable time to file a dispute, businesses have a much shorter window to respond. And those response timeframes vary by payment platform.
Ultimately, the best way to handle chargebacks is to prevent them from happening in the first place.
How to Prevent Chargebacks
Because friendly fraud is a legitimate purchase, it’s hard to prevent. Some banks and credit card issuers are taking action to aid businesses. In 2023, Visa, Inc. announced its new dispute process aimed at combatting first-party fraud for card-not-present transactions. The rule change offers merchants more ways to show a disputed charge is valid and authorized.
Process improvements like these are needed to reverse the rise in chargeback fraud, especially given how savvy fraudsters are in countering fraud prevention measures. With the right steps in place, businesses can improve their ability to maximize revenue, minimize risks and improve the likelihood of winning their chargeback disputes.
1. Facilitate Communication
Make it easy for customers to get in touch with you via a variety of 24/7 communication methods. Send order updates with shipping and tracking information so customers know where their merchandise is every step of the way.
2. Make Things Clear
Make sure that customers can easily find cancellation, refund and return policies, as well as shipping information. These should be clearly stated on the website, receipts, emails and texts — and even consider pop-up notifications as they apply.
3. Send Reminders of Recurring Orders
Make sure customers who have signed up for recurring orders are notified well in advance of those charges hitting their credit cards. Make sure customers also know how to cancel their orders — and make it easy for them to do so.
4. Require Signatures at Delivery
High-value items are among the most likely to be stolen or be involved in a fraud scheme. By requiring signatures for deliveries, especially high-value orders, companies can make it harder for a customer to deny receipt.
ClearSale’s Approach to Chargeback Management
Even businesses that do everything right will occasionally find themselves the victim of fraud and chargebacks. That’s why they need the guaranteed protection that comes with the business chargeback insurance that ClearSale offers. If we approve a transaction that turns out to be fraudulent and results in a chargeback, we’ll pay the entire amount of the chargeback — guaranteed.
If you want the peace of mind that comes with knowing your business is covered no matter what happens, contact a ClearSale analyst today.
