According to dispute mitigation company Chargebacks911, this type of fraud spikes during large-scale security breaches, due to consumers’ increasing education about identity theft who use that knowledge to initiate a chargeback, claiming that someone stole their identity to make a purchase, rather than admitting to buyer’s remorse or attempting to get a product or service for free.
The same source points out that when merchants fail to dispute chargebacks, they incur fines of up to USD 50 for each instance. This is coupled with the fact that processors do not make money on merchants fighting chargebacks (some have even added fees when a dispute is defended, on top of the advertised chargeback fee), but remain to profit from merchants receiving chargebacks. In fact, hefty mark-ups are made by middlemen and the processors, sometimes upward of 200% of their actual cost from their acquirer. A high number of chargebacks results in the merchant losing his/her merchant-processing account, thus effectively putting an internet-based company out of business.
A friendly fraud chargeback occurs when a consumer makes an online purchase with his/her own credit card, and then instigates a chargeback through the card provider after receiving the goods or services, effectively canceling the transaction and receiving a refund of the money. If the merchant fails to dispute this chargeback (which is often the case), the consumer ends up getting the goods or services for free. The merchant is charged a fine for each chargeback, and if the chargeback relates to an online transaction, the merchant is automatically adjudicated as guilty and must dispute the consumer’s accusation by filing its own case to attempt to win back the transaction value that was temporarily provided as a refund.
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