Consumers are conducting online businesses more than ever due to the pandemic. This causes problems, though, when cardholders dispute charges in record numbers. In this article, Monica Eaton-Cardone, the COO of Chargebacks911, explains why coronavirus chargebacks are happening and what merchants can do to protect their businesses.
COVID-19 dramatically altered the ecommerce landscape over the last six months. We observed a sharp increase in online activity, particularly among digital channels such as buy online, pick up in-store (BOPUS). Merchants might find the newfound popularity of online shopping good for business. However, it doesn’t come without its downsides.
We saw a significant surge in chargeback filings over the last several months as consumers flocked online to make purchases from the safety of their homes. In simple terms, chargebacks are the reversal of a credit card payment that comes directly from the bank.
Card networks created chargebacks with the intention of safeguarding the cardholder against being taken advantage of by criminal or merchant fraudOpens a new window . Nowadays, though, consumers have learned to abuse the system.
Friendly Fraud – Is it Really that Big of a Deal?
First, it’s important to understand that all chargebacks fit into one of three categories: merchant error, criminal fraud, or friendly fraud.
Criminal fraud and merchant error are both legitimate reasons for a dispute. As its name suggests, criminal fraud occurs when someone other than the cardholder makes an unauthorized purchase. With merchant error, the fault lies with the seller for failing to live up to the claims made in their terms and conditions.
Here are a few common reasons why a cardholder might file a chargeback:
- Â The item or service wasn’t delivered.
- The item or service wasn’t as described (counterfeit, wrong color, size, etc.).
- The merchant didn’t cancel the customer’s recurring payment when requested.
- The cardholder didn’t authorize the original transaction.
These can all be legitimate complaints. But, when a customer’s claim doesn’t reflect the reality of the situation, the chargeback becomes a case of friendly fraud.
Friendly fraud occurs when a customer files a chargeback instead of first trying to obtain a refund from the merchant. An authorized cardholder can dispute a legitimate charge to their credit card. This pushes the bank to force a refund under the pretense that the merchant made a mistake.
As unfair as this seems, these kinds of attacks pose a severe threat. And this problem has only been exacerbated by the pandemic, as many customers mistakenly assume that a chargeback is just a different way of requesting a refund.
At the end of the day, it doesn’t matter whether the customer abuses the chargeback process innocently or intentionally. Friendly fraud spells trouble for merchants either way and if left unchecked, it can result in lost revenue and merchandise, as well as higher fees and long-term threats to a business’s viability.
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What Can Be Done To Stop Friendly Fraud?
The greatest weapon in a merchant’s arsenal is the strategy they develop to identify all disputes by their fundamental source and address them accordingly. Tools like CVV verification, address verification service (AVS), and fraud scoring are already used by merchants to identify and prevent fraud. However, they should be part of a broader, more encompassing strategy.
The good news is that once merchant error and criminal fraud are removed from the equation, one can attribute any remaining chargebacks to friendly fraud. There’s a caveat to this, though. Namely, there’s no reliable and infallible way of detecting and preventing friendly fraud before it happens.
From the outside, a friendly fraud transaction appears to be a legitimate sale. It’s a post-transactional threat in that it doesn’t become “fraud†until the buyer decides to dispute it. That said, there are some things merchants can do to minimize risk.
As a rule of thumb, strong and effective communication can help prevent some chargebacks. It’s important for merchants to provide clear guidance and instructions regarding return policies and reply to all questions, comments, or refund requests on time. They should also maintain organized records and receipts, as thorough documentation can be a valuable resource if the merchant wants to fight a chargeback through representment.
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Taking a Stand Against Illegitimate Chargebacks
Chargeback representment is the process merchants can use to reverse the negative effects of friendly fraud. This will essentially offer a second chance to submit a transaction to the issuing bank and get paid for any legitimate transactions which are being disputed.
To do this successfully, the merchant will need to collect compelling evidence that proves that the buyer’s purchase was, in fact, valid. Examples of evidence include:
- Â Â Â Â A clear and legible copy of the sales receipt
- Â Â Â Â Any available order forms
- Â Â Â Â Tracking numbers
- Â Â Â Â A copy of your return policy
- Â Â Â Â Descriptions and pictures of the item in question
- Â Â Â Â Any customer communications indicating successful delivery or satisfaction with the quality
Unfortunately, even with the best tools and procedures in place, merchants are still susceptible to chargebacks resulting from criminal fraud or inadvertent errors. Therefore, it’s still necessary to consistently perform manual reviews on every chargeback to cover all bases and determine which cases can be fought.
The shockwaves caused by COVID-19 will likely be felt for months and even years to come. We should expect the chargeback system to be exploited to the detriment of eCommerce and retail merchants. It will take consistent and relentless effort, but fighting friendly fraud is a merchant’s responsibility. It doesn’t have to be accepted as just another “cost of doing business.â€
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