Chargebacks were initially established as a way to protect customers against losses from identity theft and unfair merchant 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 merchants big.
In 2016, e-commerce businesses lost an estimated $6.7 billion to fraud; of that amount, $4.8 billion was due to chargeback fraud and friendly fraud. And these totals are rising steadily as e-commerce increases in popularity.
With every dollar of fraud losses costing merchants an average of $2.40, it’s more important than ever for merchants 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 merchant suffers serious losses.
And it’s more common than people think. A 2015 survey reported that 7% of consumers lied about the condition of a product so they could return it. Even more shocking, 24% of respondents said either this behavior didn’t bother them or that it was OK to file these fraudulent chargebacks.
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 merchant’s return policy
Although the chargeback may not be intentionally fraudulent, it’s still fraud and is no less expensive for the merchant than true chargeback fraud.
The Negative Effects of Chargebacks on e-Commerce Merchants
Whether a chargeback is due to friendly or chargeback fraud, the result is the same: merchants 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 merchant accounts if their chargeback ratios are too high
- Reputational damage
Unfortunately, 86% of chargebacks are deemed fraudulent, which means the risk of loss is high. And if that weren’t bad enough, 40% of customers who file one fraudulent chargeback file another within 90 days — meaning merchants must always be on the lookout for ways to prevent chargebacks.
Unfortunately, fraudsters take advantage of a chargeback system that favors buyers over sellers. If merchants want to defend themselves against a chargeback, they must collect significant amounts of data — like proof on who owns the credit card, who placed the order and who received the products.
For this reason, merchants often simply accept fraudulent chargebacks rather than having to expend the time, money and effort necessary to challenge chargeback disputes successfully.
How to Minimize Chargebacks
Because friendly fraud is a legitimate purchase, it’s hard to prevent. And merchants rarely look for banks and credit card issuers for assistance — in fact, 71% of merchants feel these organizations aren’t taking the necessary steps to protect the industry from friendly fraud losses. Chargeback fraud isn’t any easier to prevent, especially when savvy fraudsters are in control.
With the right steps in place, merchants 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 to ask questions about a purchase. That means offering a variety of 24/7 communication methods, like customer service phone lines, chatbots, social media accounts and email addresses.
Also send customers regular updates about their orders — like when it was received, shipped and delivered or if there are any delays.
2. Make Things Clear
Ensure the business name that displays on a customer’s credit card statement isn’t confusing or misleading. If the billing name on their statements isn’t immediately recognizable, ensure that every customer communication — like order and shipping confirmations — explains what customers should expect to see on their statements.
Don’t forget to let customers know where they can find return and exchange information online, and link to that information on any e-mail communications, order confirmations and status updates.
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
Obtaining signatures at delivery, especially for high-value purchases, can help prove an order was delivered to the customer.
Even merchants who 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 merchant 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.
