The 2024 holiday shopping bonanza broke all records.
We saw consumers worldwide spend $1.2 trillion online, as revealed in a Salesforce report on Monday. $282 billion of that total came from the United States alone.
However, with this surge in holiday sales, merchants should also expect a correlating increase in product returns and disputed transactions, indicating a tough Q1 2025 for retailers. This is an annual phenomenon that I refer to as “the holiday hangover.”
Parsing the Holiday Hangover
Chargebacks traditionally see a rise in the first quarter of the year, as consumers reconcile their finances, deal with post-purchase regrets, or attempt to gain a swift refund on a product they’ve already utilized.
Depending on the card network, cardholders generally have up to 120 days after a purchase to lodge a chargeback claim. But, the months of January and February typically experience the peak of chargebacks, due to most disputes taking place 45 to 60 days post-purchase.
Most chargebacks result from preventable factors such as delayed shipments or buyer’s remorse. The 2024 Chargeback Field Report reveals that one-third of cardholders often find the billing descriptions that appear on their financial statements confusing or unrecognizable, adding another obstacle for merchants.
However, a rising number of chargebacks are resulting from friendly fraud. This can be any situation where customers dispute legitimate charges to acquire items or services without charge.
Retailers, especially those in eCommerce, are celebrating a record-breaking holiday season, but the returns and chargebacks soon to flood in represent a real challenge. With economic pressures still weighing on consumers and word spreading on social media of how to exploit the dispute process, the temptation to misuse chargebacks has grown, and merchants must act quickly to protect their Golden Quarter revenue.
The Problem is Not Going Away
An MRC and Verifi survey indicates that friendly fraud is the second most prevalent type of fraud, beating card testing and identity theft. Notably, Visa reports that friendly fraud accounts for up to 75% of all chargebacks, underlining the growing problem of chargeback misuse and abuse.
The 2024 Cardholder Dispute Index further reveals that the ongoing issue of friendly fraud is worsened by customers approaching their issuing bank for a chargeback instead of asking the merchant for a refund. Such a practice, which banks are often inclined to entertain, is setting a precedent that this behavior will be rewarded. And, consumer sentiment seems to be in favor of this.
Half of the survey respondents admitted to disputing a transaction with their bank without even contacting the merchant first. Worse still, nearly three-quarters of cardholders view disputes as a legitimate alternative to requesting a merchant refund, despite the fact that chargebacks cost merchants 3.75 times the transaction value due to fees, penalties, and staffing resources.
What Merchants Can Do
The problem is out of control, and until regulators and card networks amend the chargeback process so that it’s fair and balanced for both merchants and cardholders, retailers need to do what they can to prevent and manage chargebacks. Retailers who take a proactive, data-driven approach can not only recover lost revenue, but also improve long-term decision making and customer satisfaction.
I suggest that merchants adopt the following methods to prevent and defend against friendly fraud:
Take Advantage of AI
Use AI-powered fraud prevention tools to analyze transaction data and identify issues. This data can be used as proof in the representment process or underline operational errors. Early dispute alerts can also inform merchants of disputes, allowing for refunds or challenges before escalation.
Review Billing Descriptors
Many cardholders dispute charges because they don’t recognize billing descriptions. Merchants should check their descriptor with their account representative and modify it to ensure clarity on customer statements.
Improve Customer Service
Slow or inadequate customer service increases the risk of chargebacks. Merchants must resolve customer issues fast to prevent disputes and minimize revenue loss due to chargebacks.
Communicate Clearly
Transparency is key. Inform customers about shipping times, return policies, and potential delays. Sending order confirmation with tracking details and updates can manage expectations and avoid disputes.
Fight Back
Always respond to chargebacks, even those caused by merchant error. Representment can recover lost funds and build better relationships with card networks.
Record-breaking sales are worth celebrating, but unless merchants prepare for the holiday hangover, the impact of returns and chargebacks could overshadow this spike in revenue. Now is the time to implement a comprehensive, end-to-end chargeback prevention strategy to ensure a strong start to the new year.
