There is probably no other word that can trigger an e-commerce merchant as much as “chargebacks.” Without proper insight, chargebacks and refunds look like the same thing. But this couldn’t be further from the truth. If a customer has issues with a product they have purchased, they can contact the merchant, and, more often than not, they will resolve it with a refund. However, in some cases, the customer will raise a dispute with the bank. The bank resolves conflicts, and the merchant doesn’t know about it until the money is retrieved. Banks levy a fee with chargebacks. This can lead to an increase in a merchant’s chargeback ratio. Once this chargeback ratio reaches 1%, the merchant has to put up with consequences like fines, higher fees, and even suspension or termination of their account. Chargebacks cater to customers who have lost money in a purchase.
Customers may have gotten a subpar product, or what they must’ve received may not be what they expected. For example, hackers may have used customers’ payment information to make unauthorized transactions. In any case, customers can raise a dispute with their banks to recoup the money they paid. The constant fear of chargebacks helps keep merchants transparent with customers. Chargebacks are very clearly catered toward the customers. Customers don’t have to deal with the merchant and can expedite refunds via the bank.
The origin story of chargebacks
Back in the 1970s, when credit cards had just become a thing in the U.S., most people weren’t comfortable getting one. The hesitation was due to fear of a card getting stolen or merchants using credit card information to commit fraud. To address this very genuine concern, the U.S. passed the Fair Credit Card Billing act in 1974, which created a deterrent for fraud. Without the fear of fraudulent payments, the average consumer started using credit cards more often. This led to a boom in credit card usage, and they became all the rage.
If a customer is unhappy with a purchase, they can contact the merchant and resolve the issue. However, quite often, both parties may arrive at a stalemate. The merchant may not budge and offer a refund, and the consumer may be left with an unsatisfying product or service. In situations like these, consumers can directly contact their bank and raise a dispute with them. The bank will resolve the dispute once it deems the customer’s problem to be genuine. The bank will unauthorize the transaction in question, and the bank will retrieve the money directly from the merchant’s bank account. However, the merchants will be charged a hefty fee and, in some cases, lead to the termination of a merchant’s account.
Raising legitimate disputes
Credit card frauds are prevalent and can happen to anyone. Consumers, however, can quickly recoup lost money through their banks with the help of chargebacks. As soon as someone realizes that their card has been used to make an unauthorized transaction, they should reach out to their banks. Banks will then use chargebacks to retrieve the money from different merchants’ accounts. This, however, is the only situation where it is advisable directly to go to your bank instead of contacting the merchant. In any other case, it is required for customers to interact with the merchant first. Sometimes, payment may have been accidentally made or just forgotten by the customer.
Similarly, a merchant may have overcharged accidentally. In such cases, having a conversation with the merchant will help resolve the issue quickly. And, refund is the easy way out for both parties. In case of an unsatisfactory product or service, a cooperative merchant would offer a replacement or a do-over. If a customer is happy with that option, they can take it or still ask for a refund and return the product. When banks are not involved, refunds make their way to the consumer’s account faster.
Chargebacks should be the last resort for customers unless credit card fraud occurs. However, since chargebacks are customer-friendly, customers may exploit merchants by raising disputes without confronting the merchant. Or worse, they could file disputes without any legitimate reasons. The bank might still recover the money, and the customer will also get to keep the product. This will set merchants back twice the amount of the product. If you get to keep a good product without having to pay for it with the help of chargebacks, you are committing fraud. This fraud is known as friendly fraud and ails merchants worldwide, significantly affecting their revenue.
The menace of friendly fraud
Friendly frauds are often referred to as chargeback frauds. Since the chargeback process is biased towards the consumer, consumers can easily use it to their advantage for illegitimate reasons. The customer might want a refund for reasons like buyer’s remorse or simply because they can. This is the equivalent of stealing since you are getting a legitimate product/service and getting the money you paid for said product/service back. Chargeback rules haven’t changed much since their inception, which can be detrimental to genuine small businesses. Friendly frauds have long-term consequences for businesses. Several times, consumers don’t even realize what a chargeback does to the merchant. Consumers may file chargebacks to avoid interactions with the merchant and go about their day. However, once a chargeback is filed, merchants have to put up with a lot.
Chargebacks directly affect revenue since the customer gets the money and holds onto the product or service. On top of that, merchants have to pay chargeback fees ranging from $20 to $100. Based on the size of the business, there will be a chargeback threshold upon crossing which merchant’s account may get terminated, leading to loss of revenue. Once the account is terminated, the merchant may get blacklisted by most banks and processors. Opening a new account from more preferred banks can take years.
Even if the bank doesn’t close the account, the bank will make the merchant’s account a high-risk account. High-risk accounts levy steeper processing fees and are subject to be frozen at the drop of a hat. There are provisions for merchants to raise chargeback disputes. However, it can be a tiring, lengthy process that, more often than not, doesn’t yield positive results. By the time it’s over, a merchant’s invested a lot of resources in the chargeback dispute.
Preventing friendly fraud
Most businesses might think that chargebacks are unavoidable. Since there is no way of knowing when someone might file a chargeback, it’s hard to avoid them. Merchants can prevent chargebacks by keeping a paper trail of all their transactions, ensuring shipment is swift, and contacting the client after the purchase to ensure they are satisfied with their purchase. However, doing all of this manually and keeping a record of customer interactions can get tedious after a while.
There are modern technology-based solutions that counter friendly fraud. Chargebacks911 is one such example of an end-to-end chargeback management solution that uses intelligent source detection to understand the chargeback source. Chargebacks can be classified under three categories, criminal fraud, friendly fraud, and merchant error. Once the true source of the chargeback is identified, merchants are informed about which chargebacks they can fight and which ones they can avoid in the future. This increases the chargeback dispute winning rate and, in turn, reduces chargebacks. Merchants get to have a good reputation with their customers and their banks.
You need not take on the risk of chargebacks or friendly fraud. Leverage a solution that’s purpose-built to handle disputes like this, and provide a better experience for your customers and your banking partners.
Featured image: Pixabay