The Hidden Costs of Chargebacks and How to Mitigate Them

It’s no secret that the shift to online has opened many virtual doors for merchandisers. However, in online shopping environments, brands are now faced with growing challenges to balance consumer convenience with fraud prevention and protection. On the one hand, companies want to ensure trust in their brand and mitigate negative customer experiences. On the other hand, navigating advancing threats versus revenue loss caused by friendly fraud is a delicate balance for brands to walk.

Chargebacks are a consumer protection mechanism designed to provide a way for customers to dispute transactions and reclaim their money if they encounter fraudulent, unauthorized, or otherwise problematic charges on their credit or debit cards. While chargebacks were once a financial safety net protecting consumers from genuine fraud, today, they’re becoming a slippery slope that’s transforming ordinary shoppers into unintentional fraudsters.

A Background in Friendly Fraud

Friendly fraud, also known as “chargeback fraud,” occurs when a consumer makes an online purchase with their credit card, receives the product or service, but then disputes the charge with their bank to receive a refund while keeping the purchased item. Unlike traditional fraud, where a third party disrupts, intercepts or fakes a transaction, friendly fraud involves the actual cardholder initiating the chargeback on a legitimate purchase. Recent reporting estimates that merchants are expected to pay over $100 billion in chargebacks this year alone and it is suggested that friendly fraud will represent 61% of all chargebacks.

There are many causes for friendly fraud, a lot of which can be unintentional. Consumer misunderstanding, for example, might lead to a chargeback based on a buyer not recognizing a fee or forgetting about the purchase entirely, resulting in a chargeback. Family fraud might occur if a family member has made a purchase on a shared card, generating a dispute when the primary cardholder sees the charge. Subscription confusion may also lead to consumers initiating a chargeback on a recurring charge they didn’t realize they agreed to.

But what happens if the chargeback instances aren’t as accidental? 

Convenience to Entitlement: Shifting Consumer Behaviors 

There is a growing trend in ecommerce of consumer behavior resulting in illegitimate chargebacks, with one survey finding 25% of ecommerce shoppers apply for refunds even though they plan on keeping the product. This shift in customer behavior takes advantage of the security net in place meant to protect actual victims of fraud, with several factors driving this trend forward.

• An Oversimplified System: Meant to be convenient in the case of fraudulent actions, chargebacks are a quick and easy solution for consumers to receive a refund, often immediately and without investigation. Banks do this to reinforce customer trust in credit cards and maintain clients, but don’t consider or protect retailers in the process. For buyers, one quick click is a convenient solution to their issues without consideration of the broader impact.

• Digital Courage: Shopping online produces a degree of anonymity and separation between consumers and brands, fortifying customers to initiate chargebacks without remorse or consequence. What’s more is shoppers will turn small purchases into larger chargeback claims, justifying chargebacks against big companies without realizing the destructive impact on small businesses. 

• Outright Entitlement: Many customers feel justified in reclaiming their money if they are dissatisfied, regardless of the legitimacy of their dispute. If a consumer experiences regret in a purchase, they may seek a refund through a chargeback leaving the brand to literally pay for their buyer’s remorse. Shoppers are also beginning to use chargebacks as a new return policy, receiving their money back regardless, and bypassing proper channels for returns. 

Charging Against the Hidden Costs of Friendly Fraud 

The cost of chargebacks can destroy small businesses, with some reports finding that every $100 in fraudulent orders results in $207 in losses. In addition to revenue loss, including wholesale costs, shipping and fulfillment costs, or chargeback and processing fees, brands also face operational burdens including inventory discrepancies, loss of time and resources to manage disputes, and reputational damage to the brand. This is especially detrimental to small businesses, who don’t realize the cost until it’s too late due to solely focusing on positive consumer experience to build their business. 

Unfortunately for merchandisers, chargebacks are costly with long-term, lasting impacts. Fortunately for merchandisers, there are steps they can take to reduce friendly fraud:

• Over Communicate: Be clear and transparent in your communications with consumers when it comes to purchases, bills, fees, and subscriptions, that way there’s never any question about what charges appear on bank statements. Being clear in your processes steers buyers to the correct channels for resolving issues, such as returns or complaints, instead of filing a chargeback. This kind of open communication with customers reminds them that there are real people behind your brand that would be negatively impacted by fraudulent chargebacks.

• Ensure Delivery: Implement or update order tracking and delivery confirmation tools, keeping records of every step from order details to doorstep delivery. Tracking purchases improves the customer experience for legitimate purchases while doubling as evidence to dispute fraudulent non-delivery claims.

• Employ Fraud Prevention Technology: Fraud detection tools can be leveraged to identify suspicious activity such as multiple orders in a short time period, inconsistent order data, or unexpectedly large and duplicate orders. Detection technology can also investigate chargebacks for legitimacy, track fraud risk scores, and monitor a customer’s history of chargebacks and returns. These behaviors can indicate organized fraud, so even businesses that don’t have an issue with friendly fraud yet should screen for them.

Recharging the Chargeback Solution

The rise of friendly fraud has become a costly problem for brands. Chargebacks, originally meant to protect buyers from fraudulent activity, have paved a convenient way for buyers to create illegitimate refund claims. This shift, driven by consumer misunderstanding, entitlement, and the anonymity of online shopping, has resulted in substantial financial losses and operational burdens for businesses. To combat this trend and ultimately prevent businesses from paying the price, merchants must focus on clear communication, CX features, and fraud detection strategies. By taking proactive steps, brands can better protect themselves from the consequences of friendly fraud and maintain a balanced approach to consumer trust and fraud prevention. 

Original article at: https://www.globalbankingandfinance.com/when-consumer-convenience-turns-to-friendly-fraud-the-slippery-slope-of-chargebacks/