Chargebacks are a complicated issue: they are important and long-standing consumer protection mechanisms, enabling customers to reverse transactions identified as fraudulent. This serves a few different purposes:
- Ensure Customer Confidence: Cardholders will be more willing to use payment cards if they know they have some fallback option to protect against abuse.
- Keep Merchants Honest: The threat of chargebacks will deter merchants who might be tempted to engage in underhanded business practices or provide sub-par products.
- Mitigate the Impact of Fraud: Chargebacks give victims the ability to undue fraudulent transactions and recover their money.
If you’re an online merchant, though, chargebacks also represent a major risk source, as research on the subject reveals between 60 to 80 percent of all chargebacks are filed without proper justification. This practice – commonly known as “friendly fraud” – is very difficult to address because it relies on deceptive reason codes and other indicators.
What Is Friendly Fraud?
There are many reasons why a seemingly legitimate customer would commit friendly fraud. Some common examples include:
- The cardholder develops “buyer’s remorse.”
- The return process seems too complicated or demanding.
- The timeframe to request a return has expired.
- A family member, such as a child or spouse, made the purchase.
Few of these involve real malicious intent; most cardholders just don’t understand how each chargeback impacts your bottom line. Regardless, the practice carries serious consequences for everyone involved.
Friendly fraud will cost the eCommerce sector roughly $30 billion a year in lost revenue, merchandise, added fees and higher administrative costs by 2020. Businesses and financial institutions will then deploy fraud tools and strategies based on inaccurate data, in turn making consumers vulnerable to criminal fraud.
The State of Chargebacks
Friendly fraud is so pervasive due to a toxic combination of unresponsive industry policy and a lack of concrete insight. Many of the rules governing chargebacks are decades old and predate ecommerce entirely, while chargeback reason codes give merchants and institutions a false impression of dispute triggers.
The first-ever State of Chargebacks report, published in January 2018, addresses that lack of insight by surveying merchants directly to go straight to the source. The report contrasts established chargeback figures with first-person survey data, challenging much of what you may think you know about chargebacks. For example, 55 percent of ecommerce merchants believed criminal fraud was their primary chargeback source. But as we established earlier, as many as 80 percent of chargebacks are attributable to friendly fraud. This suggests a gap between retailers’ experience and how they address that experience.
You can download the full report below, but first check out eight of the key findings from the study reflected in this new infographic:
About the Author
David DeCorte is an editor and content writer with Chargebacks911, an industry-leading chargeback mitigation service. David writes extensively on subjects including business, ecommerce, payments and fraud prevention. He is also a guest contributor to several humor and pop culture publications and educational blogs.