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March 15, 2022updated 30 Jun 2022 10:48am

A whistle-stop tour of chargebacks for merchants

Michael Ault discusses chargeback costs for merchants, the root causes of chargebacks and how businesses can best defend themselves against potential losses?

Chargebacks are a thorn in the side of merchants across all verticals. Michael Ault, CEO of UTP offers insight into the root causes of chargebacks, and how you can best defend your business against potential losses.

The word itself is enough to give merchants a headache. Chargebacks allow consumers to dispute a payment they’ve made with their credit card and ask their bank to reverse the payment. The decision then rests with the customer’s bank whether to agree with the consumer or uphold payment to the merchant.

Chargebacks lead to lost profits and place huge burdens on merchants in the form of manual investigations, customer dispute resolution and the hassles of dealing with acquirer and payment network demands.

Yet many merchants believe it costs too much to avoid chargebacks. Contrary to what you might think, transaction disputes don’t need to be just another cost of doing business. In many cases, chargebacks are actually preventable.

Not-so-friendly fraud

Broadly speaking, chargeback claims fall into three general categories: true fraud, friendly fraud and merchant error.

True fraud is the result of hacking or identity theft, and it may surprise you to know that it could be responsible for fewer than 10% of all chargebacks. It is actually friendly fraud (when a cardholder disputes a charge they knowingly and intentionally made) that continues to be the number one cause of chargebacks.

With consumer behavior changing due to the pandemic, digital transactions have increased dramatically, resulting in more frequent friendly fraud cases. According to statistics from Expert Market, friend fraud is increasing every couple of years at a rate of around 41%. As many as 86% of chargebacks are “probable cases of friendly fraud”.

Typically customers committing friendly fraud claim their item wasn’t delivered or it doesn’t match the online description. They might also say they returned an item but a refund was not processed, or even that they don’t remember making the purchase.

The cost of merchant error

The problem is, of course, some of these claims might well be genuine. Somewhere between 15% and 35% of all chargebacks are caused by merchant error, which can include duplicate charges, incorrect transaction amounts, inaccurate invoicing or even just a failure to issue a refund on an agreed-upon timeline. Merchants are liable for chargebacks which result from their own errors, so disputing them is not an option in these cases.

But instances of friendly fraud will likely continue to rise of as ecommerce does, so the question remains, how do you separate friendly fraud from genuine disputes?

Financial lie-detector

This is a real difficultly for many merchants, especially those without the resources to tackle the problem themselves. Without accurate information about chargeback sources and criminal activity, merchants can end up wasting substantial resources fighting the wrong problems.

Unfortunately, no fraud is completely preventable, but there are measures you can take to make it more difficult for friendly fraud to occur. Even as chargebacks and fraud continue to evolve, the good news is that merchants are taking more proactive moves to get ahead of the problem.

Increasingly, merchants are overhauling their chargeback management processes with expert payment solution partners. Some are also using advanced AI-driven and algorithm-based tools to detect and thwart fraudulent chargebacks right at the source and instantly notify merchants of any chargebacks heading their way.

The UTP Shield is a great example of this type of software algorithm. It can detect potentially fraudulent card transactions or transactions that carry a high chargeback risk, then notifies the business owner via text and e-mail, informing them of the risk of potential chargebacks and allowing them to place goods on hold to high-risk buyers. This helps merchants hold back goods from high-risk buyers and ensures that genuine disputes are rectified as soon as possible.

Fraud and chargeback solutions like this are proven to lower chargeback rates, operational costs and improve a merchant’s bottom line. By using a third-party provider like UTP and its cutting-edge UTP Shield service, with the expertise of identifying and stopping fraud and chargebacks with multi-layered solutions, merchants can cut the number of fraud incidents, as well as the costs that stem from the associated chargebacks.

Michael Ault is CEO of UTP

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