Nightmare of the Merchants! Dealing with Chargeback!

Chargeback fraud occurs when a chargeback is submitted for a purchase that was made by the cardholder. A merchant has the option to contest a chargeback if they believe it was submitted in error. Nevertheless, defending a chargeback has a number of drawbacks, such as drawn-out procedures and expensive processing costs. Sometimes retailers prefer to pay the chargeback because they feel the disadvantages outweigh the benefits.

What is Chargeback and Why It Is Important?

When a customer challenges a charge on their account statement, the payment is reversed, which is known as a chargeback.

For instance;

It's possible that the consumer received a faulty item. Alternatively, perhaps there was a processing problem and the consumer was accidentally charged twice. Under these circumstances, a client may initiate a chargeback with their bank for transactions made using credit or debit cards.

The customer gets the whole transaction amount back after it has been approved. However, the merchant has the opportunity to dispute the chargeback claim if they so want.  

Chargebacks are a problem for even the most reputable internet firms. Chargebacks provide cardholders with protection against fraudsters and dishonest business practises. Chargebacks, however, can seriously jeopardise a merchant's capacity to generate income and operate a firm.

According to one analysis, retailers will likely lose $20 billion to payment disputes brought on by illegal behaviour in 2021. That represents an 18% increase from 2020.

For merchants, chargebacks can appear unjust. They are designed to protect consumers. Due to the procedure' inherent bias in favour of the cardholder, they are shielded from:

Chargebacks vs Refunds

Chargebacks can appear to cardholders as regular refunds. But they are not. The issue is that.

Most refunds require the cardholder to send back the item(s) they purchased in order to receive their money back. Chargebacks, however, are different because the cardholder completely sidesteps the retailer and asks the bank to become involved instead.

When this occurs, the retailer forfeits both the sale's proceeds and the value of the goods. The value of overhead expenses like shipping, fulfilment, and interchange is also lost. The merchant is additionally required to pay a fee for each chargeback.

The Causes of Chargebacks

Chargeback reasons are intended to provide light on the causes of client complaints. This is due to the fact that chargebacks have changed significantly during the past few years. What was once a vital component of consumer protection turned into a customer-driven weapon for fraud.

Not that chargebacks no longer fulfil their original purpose. Regrettably, the expansion of eCommerce revealed security gaps and increased chances for fraud. Ironically, a system created to safeguard consumers from fraud has evolved into a convenient mechanism for cards to defraud companies.  

The issuer assigns a reason code when they accept a chargeback from the cardholder. The reason codes used by each card scheme vary, however they always belong to one of the following groups:

• Fraud

Merchant fraud is a premeditated illegal conduct committed by the merchant against the customer (not to be confused with merchant error). Several instances of criminal fraud committed by retailers include:

Failing to deliver a good or render a service after accepting money, selling a fake or imitation product while claiming it is the real thing.

The practise of adding more money to a restaurant bill than what the patron authorised.

Cardholders have the right to challenge transactions that turn out to be fraudulent on the side of the merchant. As a result, they can use the chargeback dispute procedure to retrieve their money (and punish the seller).  

According to the cardholder, they never initiated nor authorised the transaction.

• Merchant Error

Any chargeback that results from the cardholder not receiving what they paid for in accordance with their purchase agreement with the merchant or when the merchant inadvertently charges the cardholder for an incorrect, duplicate, or unlawful transaction is known as a merchant error chargeback.

When cardholders are unhappy with the quality of the products or services they received from the retailer, they frequently seek to dispute a transaction.

• Abuse of Chargebacks on Purpose (Cyber Shoplifting)

Fraudulent consumer chargebacks represent the other end of the spectrum. Here, a properly made, authorised, and received purchase is the subject of a chargeback by the cardholder. As a result, the fraudster is the cardholder.

When a cardholder authorises a transaction, receives the item or service as promised, and then fraudulently files a chargeback against the retailer, this is known as intentional chargeback abuse (also known as "cyber shoplifting").

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How Merchants Deal with Chargeback?

Customers who are trustworthy and consistent are crucial to how businesses combat chargeback fraud. Because chargeback misuse involves honest customers using their own credit cards to commit fraud, merchants are unsure of whether or what to challenge. When merchants do discover false chargebacks, the labour and resource requirements of the chargeback dispute procedure generally outweigh the benefits, so they decide to leave things alone. The issue is that challenging bogus chargebacks does little to deter abusers. A merchant who decides not to contest opens the door for repeat offenders.

The majority of merchants lack the time, tools, or knowledge necessary to make internal dispute resolution the most economical or effective option. Instead, for the purpose of preventing chargeback fraud, merchants should rely on data-based judgments.

Best option for the reduce of chargebacks is, using the right fraud technologies.

As a result of Paypal's research, four of the seven members fraud team are fully dedicated to chargebacks. With help of the Formica Risk Orchestration Platform, you can reduce these numbers and fight with chargeback more efficiently.

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For getting more information about Formica's fight with fraud, you can check our BNPL fraud to refresh your knowledge!

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