In the ever-evolving landscape of digital commerce, chargebacks and friendly fraud (also known as first-party fraud, as this fraudulent behaviour is all except friendly) have become one of the main concerns for merchants since they represent an opaque area resulting in a significant loss.
In 2023, chargebacks are expected to represent around USD 120 billion (according to a projection made by Chargebacks911 based on Mastercard data) in global losses for merchants. First-party fraud, making up to 75% of these chargebacks (according to Visa), would therefore cost merchants around USD 90 billion annually. The rise in ecommerce has exacerbated this issue, with first-party fraud increasing by 20% every year (according to Adyen). Addressing this requires enhanced verification methods and improved dispute management systems to mitigate losses and safeguard against fraudulent claims.
On the one hand, a chargeback is a transaction reversal initiated by a cardholder's bank to dispute unauthorised or erroneous charges, providing consumer protection against fraud and merchant errors. On the other hand, first-party or friendly fraud occurs when a cardholder disputes a legitimate charge to get a refund while keeping the goods or services, often intentionally exploiting the system. The key difference lies in intent: chargebacks address genuine issues, while friendly fraud involves deceitful claims. Both can be costly for merchants, but friendly fraud is harder to combat as it involves disputes over transactions initially authorised by the cardholder.
Very close to first-party fraud, as most of the time it is also undertaken by genuine customers, policy abuse is being experienced by most merchants more and more often. Policy abuse refers to situations where consumers exploit or manipulate the terms and conditions set by merchants or service providers. This can include exploiting return policies, abusing loyalty programmes, using loopholes in discount offers, or making false claims to receive refunds or compensation.
To effectively address chargebacks, first-party fraud, and policy abuse, businesses can implement a multi-faceted approach by leveraging insights and strategies from industry experts:
Clear policies and communication – follow guidelines from the most reliable sources, like the card networks, and ensure transparent policies regarding transactions, returns, and dispute resolutions are clearly communicated to customers in order to mitigate policy abuse.
Advanced fraud prevention strategy – consider utilising specialised tools that employ machine learning (ML) and artificial intelligence (AI) to detect suspicious patterns and prevent fraudulent transactions proactively. Their key strength versus traditional rule-based tools is that they collect an extremely high number of data points so that they can individually determine the customer profile and therefore make better decisions – therefore, this applies to chargebacks but also to policy abuse like ‘wardrobing’ (i.e., customers returning a product after they have used it for a specific occasion) or refund fraud (i.e., returning a different product from the one that was originally purchased). Plus, some of these solutions can also propose a chargeback guarantee, which can be relevant in certain cases.
Real-time chargeback monitoring and response – employ real-time chargeback monitoring systems, either internal or from specialised providers, to identify and respond promptly to potential chargeback situations, preventing some of them before they even become a chargeback and resolving disputes before they escalate.
By integrating these strategies into their operations, businesses can effectively mitigate the risks associated with chargebacks, first-party fraud, and policy abuse. This proactive approach not only protects financial interests but also enhances customer satisfaction and strengthens the overall security posture of the organisation.
Chargebacks and friendly fraud present significant challenges in the landscape of digital commerce. Thus, implementing an effective chargeback strategy yields several key benefits for businesses:
Reduced financial losses – by deploying advanced fraud detection technologies and proactive monitoring systems, businesses can identify and prevent fraudulent transactions early. This minimises the financial impact of chargebacks and preserves revenue.
Enhanced customer trust – transparent communication of policies and proactive management of disputes contribute to a positive customer experience. Resolving chargebacks promptly and fairly can build trust and loyalty among customers, reinforcing their confidence in the business.
Compliance with industry standards – following best practices and guidelines from organisations like Visa ensures compliance with industry regulations and standards. This protects the business from penalties and maintains its reputation in the marketplace.
Improved operational efficiency – clear policies and streamlined dispute resolution processes enable businesses to handle chargebacks more efficiently. This reduces administrative burdens and allows staff to focus on core operations rather than managing disputes reactively.
Stronger relationships with payment providers – effective chargeback management fosters positive relationships with payment processors and card networks. This can lead to lower processing fees, better terms, and quicker resolution of payment issues.
In conclusion, a well-executed chargeback strategy not only protects the financial health of the business but also enhances customer satisfaction, strengthens operational efficiency, and fosters positive relationships within the payment ecosystem. By investing in technologies, policies, and training that support effective chargeback management, businesses can mitigate risks and position themselves for long-term success in an increasingly digital and competitive marketplace. Please refer to Redbridge’s website for further chargebacks mitigation strategies while ensuring maximised acceptance rates.
Leading the European payment practice at Redbridge, Gabriel has been providing strategic advice to international and multichannel merchants in their payment transformation and optimisation journeys since 2020. He previously worked for four years as Chief Operating Officer at a France-based Electronic Money Institution (EMI) specialised in alternative payment methods.
Redbridge Debt and Treasury Advisory is a leading financial management partner to corporations around the globe. It is committed to providing each client with all the information required to make the best decisions and optimise their financial performance. Redbridge’s teams are located in Houston, New York, Paris, Geneva, and London.
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