Chargeback management is often an afterthought, but it shouldn't be.
Friendliness and fraudulence- as odd as these terms may seem when placed together in close proximity, the consumer-merchant dynamics have lately been experiencing an uptick in this unpleasant crossover. A customer makes a legitimate purchase, and then, strangely enough, they ask for their money back- incidents that are called chargeback frauds, also known as friendly frauds. As to why chargebacks occur, the reasons could fall anywhere in between oversight to opportunistic behavior. However, the issue of chargeback fraud has always existed in some form, causing inconvenience and monetary loss to organizations.
New solutions, new problems
With the tremendous popularity of relatively new payment options such as Buy Now Pay Later (BNPL) and interest-free installments, occurrences of friendly fraud have become more frequent in recent times. These novel methods have indeed made payments more affordable and manageable for many. But there is a problem- as retail prices continue to rise, there is growing apprehension surrounding BNPL customers failing to fulfill their deferred payment obligations, and a subsequent spike in shoppers lodging illegitimate chargeback claims in an attempt to reclaim funds they are not lawfully owed.
In the face of escalating expenses, nearly one-third of customers on pay-later schemes acknowledge deliberately neglecting essential bills to prevent missing an installment. Even after resorting to such measures, 30% admit to still struggling to meet their repayment obligations. Grappling with overdue payments, a significant portion of pay-later users confess to taking advantage of their bank’s chargeback provision as a means to illegitimately reclaim funds.
Evidently, the opportunity for friendly fraud has grown in parallel with the exponential rise in online transactions. Benefits such as convenience, personalization and simplified decision-making has also made business models like subscriptions widely popular. From groceries to fashion to streaming and other digital services, subscription businesses of all kinds are growing fast. That’s why it’s essential for merchants who rely on recurring revenue to efficiently manage chargeback.
This is not to say that chargebacks cannot occur for legitimate reasons- they do. Consider incidents of actual criminal fraud that victimize cardholders, or instances where merchants erroneously failed to stop a recurring transaction even though the customer requested it. On the other hand though, up to 70% of chargebacks occur due to friendly fraud.
How do chargebacks affect approval rates and what does it mean for merchants?
Chargebacks can cost your company between $20 and $50 in fees. That's on top of the opportunity costs associated with the time it takes to fight chargebacks. According to data from LexisNexis, merchants experienced an average revenue loss of $3.60 for every $1 of the original transaction value. Moreover, high chargeback rates directly impact your relationship with your payment provider. Payment providers will increase fees and put higher guards on payment authorizations on accounts that have high chargebacks. In a lot of cases your relationship with your payment processor can be impacted even if you routinely “win” your chargebacks.
Apart from being time-consuming and expensive, chargebacks can also significantly impact a business’s ability to generate revenue. There exists a strong correlation between chargebacks and approval rates. When chargebacks spike, transaction approval rates tend to fall as the merchant is seen as a greater risk to issuers. If a merchant consistently exceeds the chargeback threshold over several months, they may be regarded as a potential liability and consequently be dropped by the card issuer, payment processor, or both.
Considering how chargeback rates serve as a crucial metric for banks and card networks to evaluate merchants, it is an aspect that certainly cannot be ignored. This metric aids them in distinguishing between merchants deemed "secure" and those who may pose potential risks.
It’s also worth noting that other factors like the number of transactions processed each month, product vertical and so on, also need to be taken into account. Additionally, each card network assigns a distinct rate due to the consideration of transactions exclusively made on its own network. Visa, for example, solely takes into account transactions and chargebacks associated with Visa cards. Consequently, it is possible to comply with chargeback rate limits on one network while simultaneously violating them on another.
Prevention is (always) better than cure
A notable distinction between friendly fraud and criminal schemes like identity theft or account takeover lies in the timing of the threat. Unlike those schemes, friendly fraud poses a post-transactional threat, as the fraudulent activity may not occur for months after the purchase in question. Also keep in mind that many customers genuinely misunderstand the chargeback process and dispute a charge without being fully aware of the repercussions of their actions.
Therefore, it is fundamental for merchants to put together a solid chargeback management strategy in place to skillfully navigate the complex realm of chargebacks and friendly fraud. For instance, identify instances that can be solved with a prompt refund instead of spending a disproportionate time, effort and money compiling cases. Another option is to opt for a chargeback management software to automatically produce rules-based responses to inquiries.
It’s also recommended that merchants who are susceptible to chargebacks such as trial merchants, subscriptions, and high-risk MCCs, to add variety to data, insights, and chargeback automation based on the particular business model.
Simple improvements such as effective and timely communication with customers and making it easier for them to reach out to merchants will make a considerable difference. Learn how to manage chargebacks through this step-by-step guide.
Founded in 2020, Revolv3 is a payment company with a cutting-edge SaaS optimization platform that revolutionizes billing for card-on-file merchants. By leveraging adaptive technology, Revolv3 ensures the industry's highest credit card approval rates, resulting in increased revenue, reduced churn, and improved cost efficiency.