One thing I am often asked is how merchants can tell if they actually have a chargeback problem. On the surface, the answer seems obvious: if you have chargebacks, you have a chargeback problem, right?
But maybe it’s not obvious: the question almost always comes from someone running a smaller business, and the individual typically has a limited familiarity with chargebacks as a whole. Maybe this is the first chargeback the company has received; perhaps they’re consistently seeing two or three a month. Whatever the situation, most are saying “I’ve received chargebacks, but at what point should I consider that a serious problem?”
The Wrong Question
When I get this type of inquiry, my first thought is always, “You’re asking the wrong question!” Far too many merchants are of the mindset that chargebacks—while annoying—are an inevitable cost of doing business. They want some sort of magic cut-off point after which they have to take action…believing that until they reach that point, it’s safe to ignore them.
But the truth is, even the occasional chargeback can cause a lot of grief, both financial and otherwise. Chargebacks are like snowballs rolling down a hill: a small one may not seem like an issue, but if not stopped, it will inevitably grow into more and bigger problems down the road.
Should you wait until that happens? Absolutely not! There are ways to dispute invalid chargebacks, but prevention is always better than trying to fight the problem after it happens.
Only a certain percentage of chargebacks can be prevented, but then, chargebacks were never designed to be an ongoing issue for merchants. The entire chargeback system was only ever meant to be a “fail-safe” of sorts, a place to turn for resolution when every other avenue had been tried.
Unfortunately, consumers have discovered that filing a chargeback with the bank can be a faster, easier experience than attempting a straight-up return. With more customers going this route, banks are feeling inundated with chargeback requests…and since their loyalty will always be to their customer, it’s sometimes less hassle to just let the chargeback go through without performing due diligence.
In order to manage chargebacks with any success at all, merchants have to know why they’re receiving chargebacks in the first place. Identifying that requires some background information.
The True Sources of Fraud
When most people think of online fraud, they think of shady characters committing identity theft. That does happen, and it is a problem. But only a small percentage—10 percent or less—of chargebacks are filed because of stolen identity or other criminal fraud.
The remainder can be traced back to either the merchant or the customer. All chargebacks result from one of those three sources: criminal fraud, merchant error, or chargeback fraud (“friendly fraud”).
It’s hard for merchants to dispute criminal fraud chargebacks, because in those cases, the cardholder has a legitimate complaint. What merchants can do, however, is leverage every tool at their disposal to verify customers and identify fraudulent transactions before finalizing the sale. Take advantage of things like Address Verification Service, (AVS), 3-D Secure, CVV verification, and more with every transaction
Inflexible policies, misleading product descriptions, avoidable mistakes on the part of the merchant: any of these things can trigger chargebacks, but all are easily solved.
Offering fast, flexible “no-hassle” returns, for example, can make calling the bank a less attractive option. Multiple pictures and detailed product descriptions helps customers be sure of what they’re ordering. Live 24-hour customer service can demonstrate that you are responsive to customer needs.
The key here is for merchants to remove customers’ excuses for calling the bank…so make your policies clear, easy-to-understand, and obvious. Use tracking so customers are updated on deliveries. Clarify all billing descriptors. And respond to calls or social media questions quickly. The more your customers trust you, the more they’ll give you the benefit of the doubt when an issue arises.
Who’s Responsible for Friendly Fraud?
While it’s good to do all you can to prevent chargebacks caused by merchant error and criminal fraud, the largest majority of chargebacks—as high as 86 percent of them—come from friendly fraud.
It’s almost impossible to prevent friendly fraud, since by definition it’s a post-transactional threat. There’s no way to identify friendly fraud because it only “becomes” fraud after the transaction is complete and the customer files a dispute.
Uninformed customers may accidentally commit friendly fraud because they don’t understand the differences between a traditional return and a bank-issued refund. They assume a chargeback is simply a different way of getting their money back, like a regular return. Or they could simply be calling the bank about a charge they don’t remember, unintentionally kicking off the chargeback process.
More and more, however, consumers are knowingly abusing loopholes in the chargeback rules, maliciously attempting to get something for free. While some experts differentiate between chargeback fraud (malicious) and friendly fraud (an honest mistake), the distinction is largely academic. Both types of fraud involve filing an undeserved chargeback, and both have the same end effect.
The Cycle of Friendly Fraud
Every $100 in chargeback costs the merchant around $300, including fees and administrative costs. A single chargeback on a high-value transaction can have a substantial impact on a merchant’s revenue flow…but in the case of friendly fraud, the problem is worse. Once customers acquire a taste for easily-filed chargebacks, they’re likely to recommit: 40 percent of customers who successfully file a chargeback will file another one within 60 days, and half will do it again by the 90-day mark.
Beyond that, however, you’re also looking at the effect chargebacks can have on your relationship with banks. The more chargebacks you receive, the more banks tend to start thinking the cases are legitimate. In the case of chargebacks, the merchant is considered “guilty until proven innocent”; if you’re not disputing the invalid claims, it’s easy for bank agents to start believing the problem lies with you…and that makes it easier to automatically accept future chargebacks against you without due diligence.
What Constitutes a “Chargeback Problem”?
This is why I say that receiving any chargebacks is something of a problem. As these facts reveal, chargebacks are one of the greatest threats facing modern eCommerce, and the problem is only getting worse. While the occasional chargeback may be inevitable, receiving a few on any kind of regular basis is bad news. At that point, you don’t want to be asking yourself if you have a chargeback problem. Rather, you should be asking what you can do to address the chargeback problem you already have.
