Dealing with Chargebacks: Lessons for Recovery

Chargebacks are on the rise. Tackling them could be a costly bet but a necessary one. Learn how chargebacks affect you and what you can do about them.

Chargebacks in Europe

Chargebacks have been on the rise since the start of the pandemic. While fraud continues to be the main reason behind a majority of the chargebacks, there has been a steady increase in the number of non-fraud-related cases as well. In fact, a major global card issuer saw a 333% increase in the number of non-fraud dispute cases in 2020.

Another issue is double refunds, also called double credits. Double refunds happen when a customer receives a refund from their chargeback claim and also from the merchant. Or by some other means, such as insurance, bond, or legal claim. In 2020 alone, the number of double refund cases increased by nearly 20%.

Chargebacks usually tend to be legit cases, especially in cases of fraud. Or are seasonal, for example, during Thanksgiving, Christmas, or large season sales. But economic factors resulting from the pandemic such as job losses, widespread lockdowns, and restrictions have added to the woes.

Frustrated consumers are facing disruption and financial loss. On the other hand, companies are facing cash flow issues and are delaying refunds to customers. As patience levels get stretched thin, consumers are making every effort to recoup their money. This is causing more of them to raise a chargeback claim without hearing back from their merchant on any disputed payments. Add to this fund shortage and a desire for more credit, and you have consumers who are turning to friendly fraud.

Customers are now more aware of their rights. Plus, social media groups and online forums have further emboldened them to dispute payments. As they learn from others’ experiences, some of them also find hacks to exploit loopholes in the process.

All of this has placed dispute resolution processes under severe strain and has cost merchants big money. Most merchants reconcile chargeback claims manually. Hence, they have to bring in more people to resolve the issues. This leads to increased costs. Not to mention disgruntled customers, lost sales, and reduced customer loyalty.

How does chargeback affect you, the merchant?

A chargeback is a process by which a consumer can dispute a claim on their credit or debit card. If they succeed, they get a refund. It is usually the merchant who loses this money.

Consumers raise chargeback claims in the following cases:

• When they are victims of true fraud such as card theft, identity theft, etc.
• When they don’t receive the goods or services they have paid for
• When they are overcharged or charged double the agreed price
• When they do not hear from the merchant on a refund or dispute
• When they are trying to commit “friendly fraud” and do not want to pay for the product or service they have bought

Consumers who want to dispute a charge get in touch with their bank and provide details about the reasons for the dispute. If approved, the consumer gets a refund, and the money is charged to the merchant.

In most cases, merchants are liable for chargebacks. A merchant has to prove why the chargeback should be reversed when they choose to dispute a claim. If they ignore a chargeback claim and take no action, the cardholder wins by default.

In two cases, this liability shifts from the merchant to the bank which issues the card. One, if the purchase is made using a card that has an EMV chip, but the purchase turns out to be fraudulent. Two, if the merchant uses 3D Secure verification and the transaction turns out to be a fraud. In both these cases, it is the issuing bank that is liable.

Chargebacks are a painful and costly process for merchants. It puts a lot of stress on merchants to reconcile and settle each dispute manually. The true cost of a chargeback could be as high as 6.5 times the value of the transaction, taking into account all costs such as fees, fines, lost sales, customer acquisition, etc. So, a chargeback claim worth € 100 ends up costing the merchant about € 650.

What can you do about them?

As a merchant, you can take crucial steps to avoid or at least minimize cases of unlawful chargebacks. You should have systems and processes in place to deal with chargebacks promptly when they arise.

One way is to improve communications between your internal departments. This will help information to flow smoothly, and chargebacks can be flagged on time. You will be able to make decisions quickly and resolve matters faster.

Invest in tech. As a merchant, you have to rely on advanced technology to make your chargeback and dispute processes simpler. Use machine learning and AI along with greater API access. This will help you to get more helpful insights, improve efficiency, and save costs.

Using 3D Secure and EMV payment technology is another good way to protect yourself from liability in case of fraud. Centralize your payments to allow linking of transactions, refunds, and chargebacks. This will help you to detect cases of double-dipping or when a customer tries to defraud you.

Increase data sharing between your internal departments. Using data from different sources helps you to keep track of habitual offenders.

Most importantly, speak to a specialist partner who can answer your questions and guide you in the right direction and strategy. The right payments partner has access to advanced technology and tools that can help you effectively fight the chargeback menace.

Marco Runge

Marco M. Runge was resident payment expert and PR & Marketing Manager at full service payment provider Novalnet. With a decade of industry expertise he is fully committed to e-commerce and payment topics.