Chargeback abuse emerges as a top challenge for merchants: How to combat the growing threat

Chargeback abuse costs billions, but merchants can reduce fraud with proactive strategies like customer engagement and better security

Imagine you’re an ecommerce merchant accepting credit and debit cards, diligently following legal and network guidelines. Yet, despite your efforts, you’re suddenly hit with an expensive chargeback.

Chargebacks were introduced in 1974 under the Fair Credit Billing Act to protect consumers from fraud, billing errors, and non-delivery of goods. At the time, this was a necessary safeguard. However, today’s digital age makes it easier than ever for cardholders to file chargebacks, sometimes with just a few clicks. This convenience has led to widespread abuse, known as “friendly fraud” or chargeback misuse, where consumers file disputes without valid reasons.

Industry data suggests that up to 75% of all chargebacks result from friendly fraud, and according to this year’s Chargeback Field Report, about half of merchants view chargeback abuse as their primary fraud-related challenge. This issue is growing, with merchants losing a staggering $117.47 billion to chargebacks in 2023, according to Mastercard, a number expected to rise as transaction volumes increase.

Chargeback abuse: A more granular look

Chargeback abuse stems from cardholders disputing charges for illegitimate reasons. There are valid reasons for filing a chargeback, including unauthorised transactions, merchant errors, or non-receipt of goods. However, many chargebacks occur due to buyer’s remorse, non-compliance with return policies, or simply failing to recognise a billing descriptor. Unfortunately, invalid chargebacks are becoming more common. In the Chargeback Field Report, 72% of surveyed merchants reported increased fraudulent chargebacks, with friendly fraud cases rising by 18% over the past three years.

The motivations behind illegitimate chargebacks vary. Some cardholders act maliciously, using chargebacks to get free products or refunds. However, many are simply unaware they’re doing anything wrong. In fact, three out of four cardholders surveyed equated chargebacks with refunds, mistakenly thinking the two processes were interchangeable. Over half (53%) of buyers admitted to filing chargebacks without contacting the merchant first, and 38% found it easier to dispute charges with their banks than resolve the issue directly with the merchant.

How can merchants fight chargeback abuse?

Chargeback abuse doesn’t just affect inventory or revenue; it also results in significant fees, increased processing costs, and reputational damage. The representment process, which allows merchants to dispute invalid chargebacks by submitting evidence, offers some recourse but is highly regulated and time-consuming. According to the Chargeback Field Report, 76% of merchants have in-house teams dedicated to managing disputes, while 9% outsource the task to third-party providers.

Despite these efforts, many merchants hesitate to fight chargebacks. On average, merchants only represent about half of the chargebacks they receive; of those, they win roughly 45% of the time. The overall net recovery rate for all disputes stands at just 18%. This low success rate is compounded by high fees, tight deadlines, and the complexity of gathering evidence, making it difficult to represent every case.

Prevention is Worth a Pound of Cure

While the representment process can help recover some losses, preventing chargebacks in the first place is far more cost-effective. The Chargeback Field Report outlines several preventive actions merchants can take:

• Direct customer engagement: Contacting the customer and resolving the issue before a chargeback is filed.
• Refunds: Issuing refunds to avoid disputes.
• Fraud rules: Updating policies to better identify and combat fraudulent activity.
• Sales adjustments: Declining sales from customers prone to filing chargebacks.
• Product changes: Discontinuing items that frequently lead to disputes.
• Legal recourse: Taking legal action against fraudsters.
• Clearer billing descriptors: Ensuring that billing descriptors are easily recognisable to reduce confusion.

Many merchants also leverage deflection services like Verifi Order Insight and Ethoca Consumer Clarity, which provide customers with enhanced transaction data to help them better understand their charges. According to the Chargeback Field Report, 20.2% of merchants use such services to prevent disputes before they escalate into chargebacks.

Additionally, security protocols such as multi-factor authentication (MFA) and 3-D Secure help reduce the risk of unauthorised transactions and fraud. These measures, used by 32.4% of surveyed merchants, add extra layers of authentication during checkout, lowering the likelihood of chargebacks related to fraudulent activity.

Chargeback abuse poses a significant financial burden on merchants, but there are ways to combat it. By implementing preventive strategies, engaging customers proactively, and utilising security measures, merchants can reduce the volume of illegitimate chargebacks. While the representment process provides some relief, focusing on prevention offers a more effective solution. With the right tools and practices, merchants can protect their bottom lines and discourage fraudulent chargeback claims.