The chargeback process was introduced more than four decades ago as a consumer-protection mechanism. It was meant to inspire consumer confidence in payment cards, which were still a novel concept at the time. Fast-forward to today, though, and these forced payment reversals have evolved into a significant problem for online merchants.<\/p>\n\n\n\n
Chargeback abuse\u2014commonly known as friendly fraud\u2014is a major source of loss. In fact, chargeback issuances resulting from friendly fraud were expected to reach $50 billion annually in 2020, according to Mercator Advisory Group.<\/p>\n\n\n\n
Even then, this figure is a low estimate. It doesn\u2019t account for current trends in a post-Covid environment, where we\u2019ve seen a dramatic increase in friendly fraud. These attacks were already up by the end of March, and there\u2019s no sign that they\u2019re going to slow down.<\/p>\n\n\n\n
Covid-19 might look like the source of the problem on a superficial level. If we dig deeper, though, we see four underlying factors behind the preexisting upward trend in chargeback filings:<\/p>\n\n\n\n
These four factors carry diverse ramifications for the market. For instance, roughly $118 billion in e-commerce transactions are declined each year, according to Javelin Strategy & Research. Most of these rejected purchases are false positives, meaning the merchant unnecessarily rejected the purchase in hopes of avoiding a chargeback.<\/p>\n\n\n\n
Clearly, there\u2019s a growing disconnect between merchants, financial institutions, and card networks regarding how best to address this situation. We can see this reflected in the fact that the rate of chargeback issuances in North America is expected to significantly outpace those in the European market. This is attributed to factors like strong customer authentication protocols required by the Revised Payment Services Directive (PSD2), and more widespread use of 3-D Secure technology.<\/p>\n\n\n\n
The pressure is on for industry players to find more comprehensive solutions for chargebacks. These solutions must be data-driven and adaptable, though. Otherwise, the growing disconnect between cardholders, merchants, financial institutions, and card networks will exacerbate existing problems in the market, leading to further losses.<\/p>\n\n\n\n
The good news is that, in the meantime, there are strategies merchants can employ to address these concerns. For instance, even though friendly fraud operates by concealing itself behind false chargeback reason codes, it\u2019s still helpful to have a clear understanding of what each reason code means in context.<\/p>\n\n\n\n
Merchants can\u2019t avoid friendly fraud in the same way they can detect criminal attacks or eliminate merchant errors. However, they can minimize friendly fraud risk by adopting key best practices, including:<\/p>\n\n\n\n
Also, if a merchant identifies a chargeback as friendly fraud, it\u2019s important to engage that dispute through the representment process. This is a complex, time-consuming process, which is why many merchants opt to outsource their chargeback management. It\u2019s still possible to conduct the process with in-house management. However, it will require strong evidence to support the merchant\u2019s case, such as:<\/p>\n\n\n\n
This evidence needs to be contextualized with a chargeback rebuttal letter, explaining why the original transaction was valid. Also, merchants are on a tight schedule. In most cases, they have only a few days to provide a response to their acquirer.<\/p>\n\n\n\n
Chargeback management can be a difficult and confusing process. But, with the problem of chargeback abuse only set to grow over time, it\u2019s something merchants can\u2019t afford to take for granted.<\/p>\n\n\n\n
\u2014Monica Eaton Cardone is the chief operating office and cofounder of Chargebacks911, Clearwater, Fla.<\/em><\/p>\n\n\n\nCOMMENTARY: What Will the Future Hold for Chargebacks in Digital Payments?<\/a><\/blockquote>