As ecommerce sales reach new highs, merchants are experiencing a rise in illegitimate disputes from cardholders through card-not-present (CNP) transactions. This trend is impacting consumer prices and prompting retailers to implement stricter policies and AI-driven tools to protect their revenue. To highlight the effects of friendly fraud on retailers, Chargebacks911 has published its 2024 Chargeback Field Report, providing insights into the current state of chargebacks and the strategies businesses are using to combat chargeback abuse.
Presented in partnership with Edgar, Dunn & Company, the 2024 Field Report surveyed nearly 300 retailers, from small businesses to enterprise merchants. One of the most alarming statistics revealed in the study was the spike in increased chargeback abuse; nearly three quarters of surveyed respondents reported an 18% average increase in friendly fraud since 2021.
While the chargeback process is a necessary mechanism meant to protect consumers, the misuse and abuse of the system has caused insurmountable reputational and financial damage to merchants. With 53% of cardholders disputing a transaction with their bank without contacting the retailer, merchants lose the ability to resolve disputes directly with the consumer.
Executives from Chargebacks911 said that in the US, the right to dispute transactions is protected by federal law. Unfortunately, their survey results suggest that the majority of customer disputes are actually illegitimate. In fact, major card networks estimate that as much as 70% of all credit card fraud can be traced to chargeback misuse, or ‘friendly fraud,’ an issue that surveyed merchants say has increased nearly 20% since 2021.
In 2023, Mastercard reported that chargebacks cost merchants an estimated USD 117.47 billion, with merchant errors, particularly confusing billing descriptors, being a major cause of disputes. Many merchants are unaware of how their billing appears to customers. Convenience drives cardholders to dispute transactions with banks rather than merchants, as nearly half prioritise a quick resolution. To combat this issue, Chargebacks911 experts suggest that retailers adopt chargeback alert programmes and the representment process.
Of the most useful tools being utilised to address post-transaction fraud and misuse, merchants are leaning heavily on machine-learning and AI to aggregate, analyse and act on transaction data. In fact, 62% of surveyed retailers said they are already using or plan to use AI-based technology to identify and address instances of friendly fraud.
Officials from Chargebacks911 said Chargeback data can serve as a powerful KPI, useful for both more accurate decisioning and fine-tuning strategies. It’s worth pointing out that according to their survey, merchants who used a third-party solution or software were twice as likely to know their tracking numbers.
Furthermore, card networks themselves are more aware of the impacts friendly fraud is having on merchants, and have rolled out new dispute rules to help create a more balanced framework when it comes to chargebacks. Updated rule sets like Visa’s Compelling Evidence 3.0 and Mastercard’s First-Party Trust Programme help businesses protect honest transactions and prevent illegitimate disputes by allowing for more transaction information to be submitted by retailers, including purchase history and IP addresses.
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