Chargebacks are a major threat for merchants online and brick-and-mortar businesses too. In fact, chargebacks cost businesses about $19 billion per year, according to Visa. Chargebacks affect each merchant differently, depending on the size of the business, industry, and other factors. However, most companies processing credit cards deal with chargebacks every month.
Mastercard reports that, in total, chargebacks likely topped 600 million in 2021. While some of these chargebacks were ultimately denied, they were still a major burden on merchants, payment processors, banks, and other stakeholders. Fortunately, there are steps you can take to prevent and mitigate chargebacks.
We’re going to take a look at the three most common causes of chargebacks. We’ll also cover how they affect your business and how to fight chargebacks. Let’s get to it.
The Most Common Chargebacks: Friendly Fraud
While each merchant’s experience is different, for many businesses, friendly fraud is the most common cause of chargebacks. Estimates vary, but friendly fraud often accounts for more than half of all chargebacks, with some sources pinning friendly fraud for 60 to 80 percent of disputes.
Don’t let the name fool you. “Friendly” fraud is anything but friendly. “Fraud” is the keyword, and it’s a serious risk for merchants. Friendly fraud occurs when a cardholder makes a legitimate purchase with their debit or credit card but then tries to score free products and services by filing an unwarranted chargeback.
To be clear, the merchant fulfilled the order and the products/services were delivered. The client is not upset with the purchase and doesn’t try to return it. Often, they simply want free stuff, or they simply don’t remember or recognize the purchase
Not all friendly fraud is malicious, however. In some cases, shipping took too long and the customer may have thought the shipment got lost. In other cases, the customer may have intended to return the product but instead filed a chargeback. They may have simply not wanted to deal with the hassle of returns.
No matter the reason, however, the ball is in the buyer’s court. Often, merchants have little recourse except to fight the chargeback. Unfortunately, friendly fraud is common and on the rise. Businesswire reports that 80 percent of merchants have seen an increase in friendly fraud.
How To Prevent and Fight Friendly Fraud
Business can take several steps to prevent and mitigate friendly fraud, including:
- Providing accurate, clear shipping information
- Offering an easy-to-understand and use return policy
- Requiring signature upon receipt of a delivery
- Using a chargeback dispute management platform to combat fraud
Fighting friendly fraud is often a hassle. That said, if you fail to do so, your business suffers. Not only will you lose revenues from sales, if your chargeback ratio gets too high, payment processors may decline to work with you altogether. For many businesses, this could turn into a death knell.
Second Most Common Chargebacks: Merchant Error
Ultimately, between 20 to 40 percent of chargebacks are due to merchant errors. Rates can vary substantially from business to business, depending on how proactive companies are (or are not) at managing them.
Merchant errors typically occur because the business somewhere along the line dropped the ball. Perhaps employees lost track of an order and didn’t ship it out, or maybe they shipped the wrong product.
In some cases, the merchant did everything right but something on their end still went wrong. For example, maybe you quickly shipped the right product but the shipper lost or damaged it. In this case, since it’s on the company’s side of the transaction, this is considered a merchant error.
Another common cause is poor billing descriptions. Let’s say you run “Blasting Games,” an online gaming business, but you hold the business under a different company, say Jon Doe Holdings. When a customer buys a video game, instead of seeing a charge from “Blasting Games” they see “Jon Doe Holdings.” In this case, the customer may not recognize the charge and could file a chargeback.
Whatever the cause of merchant error, it’s important for merchants to address the issues resulting in disputes. With merchant errors, the ball is in the seller’s court, meaning the steps they take (or don’t) could have a dramatic impact on the number of chargebacks received. Fortunately, there are things businesses can do to reduce these chargebacks.
How To Prevent Merchant Errors
Companies can take several steps to prevent and mitigate merchant errors, including:
- Using clear billing descriptors
- Providing shipping and tracking information
- Closely monitoring internal business processes to ensure responsive service
- Providing accurate product descriptions
- Offering an easy-to-utilize return process
Ultimately, if you find that the dispute is the result of a merchant error, it may be best to simply refund the customer before they file for a chargeback. If you’re at fault, card issuers are likely to side with cardholders and against the business. By offering responsive customer service, say through live chat, and an easy return process, you could reduce chargebacks.
Getting into a dispute over merchant errors is often a lose-lose for the business. Not only will that company lose the revenue from the sale, but they’ll also have to pay penalty fees, and eventually a rising chargeback ratio may result in higher penalties or payment processors refusing to work with you.
Third Most Common Chargebacks: Criminal Fraud
These disputes arise when an unscrupulous third-party steals someone’s credit or debit card information and then makes a purchase. Since they’re using someone else’s cards, that means they can score free stuff.
Criminal fraud, aka “true fraud,” is one of the primary reasons the American government passed the “Fair Credit Billing Act” in 1974, requiring payment processors to offer cardholders recourse, paving the way for chargebacks. However, it’s estimated that such chargebacks these days constitute only 1 to 10 percent of the total.
That said, even a single instance of criminal fraud is a serious issue. When these chargebacks arise, both the cardholder and the business are adversely affected. If the criminal is not caught, he or she may get away with free money, products, or services.
Unfortunately, customers engaging in friendly fraud may try to pass the incident off as criminal fraud. Remember, with friendly fraud, it’s the legitimate cardholder trying to score free products or money. With criminal fraud, it’s a third party. Distinguishing between friendly and criminal chargebacks is difficult.
Fortunately, there are steps you can take to mitigate criminal fraud.
How To Prevent Criminal Fraud Chargebacks
Companies can take several steps to prevent and mitigate criminal fraud, including:
- Requiring customers to provide the Card Security Code or Card Verification Value
- Shipping products only to verified addresses
- Mandating signatures for in-person sales
- Using online criminal fraud detection systems
Criminal fraud may not be a common source of disputes. Still, the numbers can add up and any revenue lost hurts. Ultimately, it’s important to proactively prevent and fight all types of chargebacks. Doing so will protect your organization.
Fortunately, modern chargeback dispute management platforms make it easier for businesses to manage chargeback disputes. And by working with chargeback experts, you can identify potential weaknesses in your business processes and operations. Once identified, it’s often possible to reduce if not eliminate risks.