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Chargebacks – a struggle for merchants

From a consumer’s perspective, chargebacks are great. They offer protection from criminal fraud and unresolvable merchant issues, ensuring that customers won’t be held accountable for transactions they didn’t authorise. And if a product arrives damaged, isn’t what was advertised, or doesn’t arrive at all, the chargeback system ensures that the customer gets their money back.

However, for retailers, chargebacks have become the thing that keeps them awake at night. Because the system is so heavily weighted in the customer’s favour, it’s open to abuse. Filing a fraudulent chargeback – known as ‘friendly fraud’ – has become so easy that it accounts for as much as 80% of a merchant’s total chargeback volume. It’s an issue that costs the industry USD 100 billion a year.

And it’s getting worse. When Chargebacks911 and Card Not Present (CNP) teamed up to survey over 200 merchants, we found that 56% of respondents have reported an increase in friendly fraud over the past three years. In our collected findings – the Chargeback Field Report – we also learned a lot about why merchants struggle to stay on top of the problem…

The biggest pain points for merchants

Monica Eaton-Cardone
Monica Eaton-Cardone

In our survey, we found that one of the biggest issues is that merchants struggle to identify the cause of chargebacks. Nearly a third (31%) said that their biggest challenge was recognising friendly fraud. Which means that they cannot distinguish between friendly fraud and genuine chargebacks – so it’s no surprise that the industry at large is failing to combat the chargebacks fraud problem.

And even when a merchant does identify friendly fraud, in many ways the difficulties are only just beginning. Each time a cardholder files a chargeback, the merchant has two options: accept the chargeback or dispute it. Those who choose to dispute enter into the process of representment, where the merchant can plead its case, prove the chargeback wasn’t warranted, and retrieve funds.

Yet, this isn’t as simple as it sounds. Disputing chargebacks was named the biggest challenge by 29% of the merchants we surveyed. Representment is an incredibly complex process, involving all kinds of documents and evidence. Compared to the relative ease of a consumer filing a chargeback claim, merchants are struggling to understand how to start the dispute process and which documents they need to share with issuers.

And for many businesses, the sheer amount of time, effort and money required to manage this process can be eye-watering, even prohibitive. In fact, we learned in our research that if a merchant didn’t dispute chargebacks at all, the main reason was because they had insufficient resources to do so.

What are the schemes doing to help?

Visa and Mastercard recently introduced new rules to help reduce the number of chargebacks merchants are experiencing. The Visa Claims Resolution (VCR) and Mastercard’s Dispute Resolution Initiative (MDRI) have both attempted to streamline the dispute process and make it easier.

However, signs are indicating that these efforts may not have had the intended effect. Four out of five merchants we surveyed (82%) believed that VCR had had little to no impact on chargeback management, with just 19% noting a drop in Visa chargebacks as a result. Well under half (42%) of merchants were even aware of MDRI at all.

Visa even released a plug-in called Visa Merchant Purchase Inquiry (VMPI) to help merchants reduce chargebacks. However, just 2% of the merchants we spoke to had implemented the solution. Even though VMPI gave merchants the resources to respond to complaints before they advanced to the chargeback stage, hardly anyone took advantage of the tool.

Help is out there – you just have to find it

The above example illustrates one of the problems with chargebacks – that merchants aren’t making use, or are unaware, of the tools that might help in the process. We discovered in our research that those who use third-party chargeback solutions reported a dispute win rate of around 20% higher than those who used internal resource to dispute chargebacks.

The writing’s on the wall. If merchants struggle to identify friendly fraud and haven’t got adequate resource to dispute chargebacks even if they do detect it, then it makes sense that these businesses should look to third-party support. These solutions can help businesses understand the source of chargebacks, as well as streamline the whole process.

The effects of friendly fraud can be hugely detrimental to merchants, but help is out there. Chargebacks don’t have to be the bogeyman hiding under the bed anymore.

By Monica Eaton-Cardone, CIO and co-founder, Chargebacks911