Fraud is an ever-growing concern for merchants, as economic conditions continue to contribute to a difficult operating environment. Indeed, we forecast that merchant losses from online payment fraud will exceed USD 362 billion globally between 2023 to 2028, with losses reaching USD 91 billion in 2028 alone.
Fraud is a very broad issue – manifesting in many different types and forms. Recent years have seen strong growth in the prevalence of APP (authorised push payment) fraud, in which a victim is scammed into sending money to a fraudster. The use of synthetic identity for account opening is also a major challenge. However, out of all the trends and types within fraud, one particularly problematic element of fraud has emerged in the form of chargebacks.
Chargebacks are defined as ‘a mechanism, in place for payment cards, that allows a customer to dispute charges via their bank/card issuer, which is then raised as a dispute with the merchant.’
This process is well established but is, nevertheless, causing increasing headaches for merchants. There is increasing consumer awareness around the existence of chargebacks, which is driving strong year-on-year increases in chargebacks:
Mastercard has stated that industry-wide chargeback volumes are expected to reach 337 million by 2026, a 42% increase from 2023 levels. This demonstrates the scale of the challenge with which merchants, banks, and other issuers must contend.
One root cause of this type of fraud is the changing nature of chargebacks as a mechanism. Chargebacks were originally designed to primarily combat third-party fraud, which occurs when a fraudster illicitly obtains a victim’s card details and uses them to make fraudulent purchases. For this reason, chargebacks are vital, and represent a critical protection for consumers. However, the rise of friendly fraud is having a major impact.
‘Friendly fraud is when a cardholder identifies a purchase on their transaction statement as fraudulent and disputes it via their card issuer, initiating the chargeback process. In these scenarios, the queried transactions were legitimately made by the cardholder or someone else in their household.’
These friendly fraud transactions can occur in various scenarios, such as making a large purchase and later regretting it, disputing transactions for in-game purchases made by the cardholder’s children on a device they had access to or initiating a chargeback instead of a customer service interaction, as it can be more convenient from the consumer’s perspective.
While this behaviour is clearly fraudulent, data shows that these practices are increasingly common and accepted. One example of this is within the UK. A September 2023 survey carried out by Cifas, a fraud prevention service in the UK, revealed that 1 in 8 (12%) UK adults had committed one or more first party frauds in the last 12 months – an increase from 10% in 2022 and 8% the year before.
In the same survey, 21% of those who carried out fraudulent behaviours identified that they engaged in gaming chargeback fraud, where money for lost gambling bets is recovered via a chargeback.
As this kind of behaviour is increasing, preventing illegitimate chargebacks is more important than ever, and must be an immediate priority for merchants. This is reinforced by other trends within chargebacks, such as increased disputes around cards used within BNPL (Buy Now, Pay Later) arrangements and the complexity of chargebacks within subscription services.
Preventing chargebacks is a crucial task but is certainly easier said than done. A recent study conducted by Riskified and Paladin Fraud found that due to the complex nature of the dispute resolution process for chargebacks, nearly 60% of merchants are leaving at least two in five chargebacks undisputed, leading to significant damage to profits.
This is reflective of the overall chargebacks landscape; merchants face an increasingly difficult situation, since not only is the number of chargeback requests rising, but they also lack the tools, experience, and processes to assert their rights within the chargeback process. Businesses are leaving money on the table because they are not able to deal with chargebacks effectively.
So, what can merchants do about chargebacks? How can they more effectively deal with chargebacks and improve their results?
For chargebacks, it is all about holistic revenue prevention. Chargeback prevention is not centred around one main measure. Instead, it is about taking a holistic view of the different measures that can improve chargeback performance, leading to stronger outcomes. Some important measures merchants can take are listed below:
Robust and effective refund processes. For many consumers, chargebacks are seen as the ultimate form of resolution if they are unhappy with a purchase. Providing a clear and effective refunds & customer service process, which handles requests in a timely manner, can significantly reduce the prevalence of chargebacks. This does not mean granting refunds to everyone who requests them, but rather being very clear about why a refund is being refused, always following well-defined processes. Ultimately, there will always be customers who choose to escalate to a chargeback, but by providing good customer service, this will be minimised.
Clear terms & conditions. Providing a very clear set of terms and conditions can be impactful, as it more clearly communicates to a customer what their grounds for a dispute are. One example of this is found within subscription billing, where automatic renewals can be a major source of dispute. Ensuring that the automatic renewal process is clearly defined in the terms and conditions, and that its key elements are communicated to the customer in the sign-up process, can be helpful. This raises awareness with the customer, while also creates a more robust and defensible position when contesting a chargeback.
Using clear billing descriptors. The billing descriptor is what appears on the customer’s transaction history, alongside the charge amount and date. A major chargeback challenge occurs when these billing descriptors are unclear. In one common scenario, a customer might buy a coffee from a chain with a recognised brand name (such as Starbucks), but this will not be the name that appears on the credit card statement, as the coffee shop is operated as a franchise. In this scenario, the customer could initiate a chargeback as they simply do not understand which transaction is being referred to. By adding more information to the descriptor, such as the trading name, the location, or the type of service provided, customers are offered more clarity and will be less likely to initiate chargebacks.
Improve customer authentication. In scenarios where a transaction is effectively authenticated, chargebacks will be a less common occurrence. When authentication is used, there is a clear sign that the transaction was initiated by the correct user, which eliminates several chargeback reasons. Having clear authentication strategies and evidence of this can be highly valuable within chargeback dispute processes.
Keep comprehensive documentation. When disputing a chargeback, evidence is critical. Having documentation of every aspect of the transaction, such as what was communicated to the customer and how the payment was authorised, is crucial to effectively challenge a dispute. As such, accurate record keeping is vital.
Invest in fighting chargebacks. Chargebacks are a major challenge, so merchants should be investing in specific resource to fight them. Chargebacks are not a necessary cost of doing business, and merchants can ensure that by robustly defending against the chargebacks that they can, they improve their performance.
Adopt a specific chargeback management platform, alongside enhancing fraud prevention. Given the scale of the chargebacks challenge, using a specific platform that can enable automated chargebacks prevention is important to cope with the dramatic scale of chargebacks that merchants face. This should be coordinated with a comprehensive fraud detection and prevention strategy, which may use modern AI tools to enhance the speed and accuracy of detection.
Nick Maynard is VP of Fintech Market Research at Juniper Research. His key area of focus is the fintech and payments area, including embedded finance, Open Banking, and digital wallets, among others.
Juniper Research specialises in providing best-in-class market research across mobile, online, and disruptive technologies. We offer in-depth reports, forecasts, annual subscriptions, and consultancy. Our global clients include banks, payment providers, and many others. To find out how we can help you, contact info@juniperresearch.com or visit www.juniperresearch.com.
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