The chargeback system was introduced as a way to encourage people to be bolder and more confident in using credit cards instead of cash back in 1974. The reason being that the credit card system was not widely accepted back when was introduced in 1970. People remained suspicious and scared of the fraudulent activity that could occur through a credit card ad all the risks that came with replacing cash with a credit card. They remained convinced that credit cards could cause huge losses for them and make fraud much easier to accomplish for a fraudster or make stealing money easier for a burglar or criminal if that one card held all their funds.
Therefore, the banks were forced to introduce a security system that could convince the credit card holders that they can potentially reverse a transaction and get any money that they spent through a credit card right back if their requirements for their purchase or transaction were not met by a merchant. That is what made credit cards way more secure than physical cash for the users and convinced them that chargebacks could help them get their money back from people even after trading with them and therefore, give them a great edge over merchants of every kind good or bad.
The problem with the chargeback system is that it is not very safe for merchants and gives consumers a right to reverse virtually all kinds of transactions with merchants that they feel the littlest dissatisfaction towards. It gives them an upper hand against the fair transactions as well, as the merchant’s terms and conditions are not considered by the bank and the funds are actually reversed from the merchant’s account by force. The reason why it is called friendly fraud is that consumers have been exploiting this chargeback system for a long time and gaining unfair advantages.
Even the services that meet the set criteria can be and are rejected by customers only because they can just reverse a transaction. Not only that, but customers can keep the products or use the services and then get the money back too – so they end up with everything they need plus the merchant’s rightful earning – something that the merchant has every right to withhold. Although the banks have a proper chargeback cycle set to make sure that the chargebacks are legitimate, many situational factors are ignored and thus the customer gains an advantage. But that is not where the problem ends for merchants – not merely a loss of revenue but many other complications as well.
Friendly fraud or chargeback fraud is the next most common type of fraud occurring in the world after criminal fraud. That is why it can be a major cause of concern in the world of eCommerce where the merchant has very little say against a valid or invalid chargeback initiated by a customer due to the rights given to them by their bank.
According to chargebacks911, there are many common situations where a chargeback becomes a friendly fraud:
- The consumer uses a chargeback to avoid a restocking or handling fee.
- The consumer has “buyer’s remorse.”
- The return process seems too cumbersome.
- The consumer wasn’t patient enough to wait for (or didn’t understand) the delivery schedule.
- The consumer didn’t act promptly, and the return time limit has expired.
- A family member made the purchase, but the cardholder doesn’t want to pay the bill.
- The cardholder forgot about or didn’t recognize the transaction.
- The cardholder wants to make some extra money and/or wants something for free.
Complications for Merchants
There are many different kinds of complications that can occur on the merchants’ side when they face a lot of chargeback fraud from their customers. Not only can it cause a loss of revenue but also a holistic impact on the rest of the business as well. Let us review how it does that.
Administrative Costs of chargeback
Not only do the merchants get the sum paid by the customer subtracted from their bank balance, but they also get an additional fee whenever they face a chargeback that does NOT reduce and get refunded even if the chargeback is withdrawn or deemed invalid by the bank later on. Administrative costs of chargeback are high and cannot be avoided no matter what – nor can the risks that the chargeback brings with it.
Excessive Chargeback Fine
If a merchant is faced by too many chargebacks in a given period of time, there will be an additional fine levied on them due to their tendency to leave the bank customers dissatisfied or indulge in fraudulent practices – even though the chargeback may be a friendly fraud and not valid at all or related to fraud committed by the merchant or their merchandise. There is a threshold set by the bank to determine how many chargebacks make the merchant liable to that fine.
The Consumer Gets to Keep the Merchandize
In many cases, the consumer has already availed the service or received the product, and they can simply keep it in addition to the money they receive from the chargeback. Things get very unfair as they can keep everything – although it is in the bank’s regulations for the customer to return the merchandise, it is not exactly in their control. What is in their control is the merchant’s bank account. They can close it, terminate it, levy a fine on it, or withdraw money from it – therefore, the merchant loses the most.
Another important drawback of the chargeback fraud compared to other types of fraud that merchants face is that it can cause their account to get terminated if it continues for a while. Their eCommerce store will get stagnated if they cannot process and receive payments at all, and their business will subsequently get ruined due to the fact that the frequency with which they contacted friendly fraud remained high for a while.
High-risk Merchant Accounts
Steep processing fees and revenue stealing rolling reserves come with the ownership of a high-risk merchant account – in other words, an account that has faced a lot of chargeback fraud and is nearing termination. That is an irreversible change that can significantly reduce the revenue of a business.
Blacklisting from Banks
If the merchant’s account is terminated due to excessive cases of chargebacks whether they are valid or invalid, whether they are actually executed or just reported, they will be on the blacklist of all other banks too – they cannot open an account with any bank for five years and bankruptcy awaits that merchant merely due to the fact that they could not protect themselves against chargeback fraud.
Disputes take Resources
Filing charges against chargeback fraud to defend your business against an invalid complaint will take a lot of resources that could otherwise be invested in your business growth and marketing and other important areas. Therefore, winning the case is also very hard and practically not feasible.
Increasing Termination Risks do not Reduce
Even if the merchant files a lawsuit against the chargeback and wins the case, they will still face the same consequences except having to return the amount paid by the customer. While the customer is unsuccessful in getting their money back, the chargeback case in itself costs the merchant a lot including an increased termination risk, getting closer to becoming a high-risk business in terms of banking, and paying the administrative costs plus the costs to hire professionals for the lawsuit.
Tips to Avoid Chargeback – Fraudulent or otherwise
All the problems listed above can be avoided by merchants if they choose offence over defence and become proactive in their approach towards chargeback fraud to prevent it. As you know that it is hard for a merchant to get out of the tight spot that the chargeback filed against them puts them in – it is better to make sure that the chargeback is stopped very early in the cycle, almost before it happens and leaves permanent, irreversible consequences even if unsuccessful.
For that purpose, it is important to know the chargeback cycle used by banks to validate the chargeback requests they receive and fulfil them. You should know the codes used for chargeback validation and how to prevent the application of one such code to your order.
Spot Fraud – Use Antifraud Plugins
While antifraud plugins like the WooCommerce Antifraud have proven their importance in combating criminal fraud, they can also do much to help you in chargeback fraud or friendly fraud because they can help you connect addresses, IPs, and even emails and blacklist those that bring harm to your business. They can help you nip the evil in the bud and avoid getting bitten by the same snake twice – helping you reduce the risk of chargeback fraud significantly.
They can also help you reduce the chargebacks that you have to face due to some real criminal activity carried out through your platform by somebody other than your customer and make sure that there is no extra burden of chargebacks on your business.
Prevent Chargebacks from Merchant Errors
While it is important for you to make sure that your customers do not exploit your platform or the chargeback system against you, it is also important to correct all the errors in your own procedures and system running to make sure that you do not incentivize or motivate consumers to go down that road of friendly fraud. It is a must for merchants to focus on boosting quality and making their policies as transparent and satisfying for customers as possible. A happy customer is the best investment indeed in terms of chargeback fraud and also serves as a preventive measure towards the same.
Prevent Chargebacks from Criminal Fraud
Antifraud tools like the WooCommerce Antifraud plugin use different kinds of measures including blacklisting of high-risk accounts and users to protect your platform from criminal fraud and that is also an essential part of preventing chargeback fraud as described above. Through these tools, you can make sure that the security of your platform does not leave any loopholes for potential fraudsters.
Prevent Chargebacks from Friendly Fraud
Make sure that you verify all the information that the customer provides you, communicate with them excessively to understand whether it is a potentially risky transaction or one that has a low chargeback risk, and also track the shipping and keep the customer updated with it to make sure that they don’t get dissatisfied due to the wrong reasons. Be transparent in your dealings, and reduce the risk of leaving the customer dissatisfied.
Be Proactive about Potential Shipping Issues
Make sure that you notify the customers of any potential delay in the shipping of the merchandise so they don’t rush it and just press the chargeback button due to a delay in shipping – and that is something that happens very often in the world of eCommerce and friendly fraud.
Keep your Marketing Honest
Don’t make tall claims that you cannot later prove to be true, and don’t use upsells and tricks to lure in customers that can later become friendly fraudsters due to the product being even minimally different from how it was described to them. Make sure that you don’t leave scope for fraud on your end and remain transparent and honest even in your marketing to set the right expectations and the criteria for the delivery. That will help you mitigate the fraud risk greatly from your side.