What is a chargeback? And how can you prevent chargeback fraud?

A chargeback is a forceful payment reversal by the bank.

Banks and credit card companies apply chargebacks when a cardholder disputes a transaction with them.

The chargeback mechanism empowers the bank or card issuer to deduct the disputed charge from the merchant’s account and remit it back to the cardholder. Although that provides consumers with needed air cover, chargebacks present a significant threat to merchants’ sustainability and livelihood.

Today’s post will shed more light on the following:

Let’s dig in!

What is the chargeback process?

Before we answer that question, it’s crucial that you understand the purpose of chargebacks and how cardholders have now weaponized chargebacks to commit friendly fraud.

Chargebacks serve as a consumer protection instrument. In that sense, chargebacks were designed to improve cardholder confidence in making card payments.

Merchants know that the probability of a forced payment reversal is high and put in the effort to improve their processes.

Next to that, chargebacks put a check on merchants to ensure optimum product and service delivery. It makes vendors transparent and accountable to their customers.

Another equally vital purpose of chargebacks is to help cardholders seek remediation when fraud incidents occur. For example, if a business created a backdoor for data brokers to access their website and profile visitors, and such practice leads to a data breach and incidental unauthorized transaction, the cardholder can quickly file a chargeback and recover their money.

Now, it’s vital to reiterate that unlike in traditional payment refunds, cardholders go over merchants’ heads and reclaim their money from the card issuer with a chargeback. And for that reason, dubious cardholders have now weaponized chargebacks to commit friendly fraud.

What is friendly fraud?

Friendly fraud, also known as chargeback fraud, is when a cardholder intentionally steals from the merchant. The consumer makes a card transaction and then files a chargeback with their bank after receiving the purchased goods or services. The chargeback nullifies the transaction cost, the cardholder receives a full refund of their money, and the merchant bears the brunt.

There are several reasons why the chargeback process is prone to such manipulation, chief among those being that the spike in technological innovation and payment options has far outpaced policy development in the industry.

Now, even well-meaning consumers can file a chargeback out of convenience. For example, a recent survey found that consumers have filed chargebacks for several invalid reasons, including:

Although such actions might seem like a fun sport to consumers, chargeback management consumes between 13% and 20% of a merchant’s operational budget, Javelin’s study indicates. Hence, merchants need to understand how chargebacks work and best practices for their mitigation.

The chargeback process is complex and overwhelming.

The chargeback cycle is daunting…even for well-experienced merchants. But not to worry, we’ll unravel all the intricacies here and help you get the hang of things quite nicely.

Here’s how it works:

From available records, merchants have less than a 20% success chance in the end. That’s why many vendors see chargeback as a cost of doing business — which is false, as you’ll soon discover.

What threats do chargebacks pose for your eCommerce?

As we intimated in the previous section, the impact of chargebacks to your eCommerce far-outweigh the loss of revenue. Chargebacks often lead to the death of a business is not managed efficiently.

The chargeback construct is consumer-focused, and every chargeback attracts non-negotiable fees. For example, suppose a cardholder filed a chargeback because they didn’t recognize a bill and eventually figured out they made the transaction, and goes on to cancel the chargeback. The merchant will still pay a non-refundable chargeback fee and associated admin charges.

Besides the fees that each case attract, merchants could lose their accounts (and even their business) due to excessive chargebacks, as we covered in this piece.

When should you fight a chargeback?

In chargeback mitigation, the first rule of thumb is that you MUST fight all meritless chargeback.

Fighting chargebacks help you regain profits that you will ordinarily have lost. It’s also a way to send needed warning to online shoplifters to stay clear of your business.

Use the following checklist to decide when you should fight a chargeback.

That said, instead of the “trial and error” of manual chargeback mitigation processes, you can prevent chargeback fraud more effectively with chargeback automation.

Surely, you can follow the standard best practices — offer timely and helpful customer service, ensure your products and services are worth the cash, make your privacy and return policy easy to find — but you a more advanced step to mitigate chargeback and friendly fraud is with chargeback automation.

And Chargeflow’s fully automated chargeback guarantee gives you absolute convenience to quickly stop fraudulent chargebacks, recover 2x more revenue, and enhance your business sustainability. All that and more while gaining access to mountains of data to improve key performance indicators of your business. Learn more.

This post was first published here.



🚀 The world's first fully-automated chargebacks solution for merchants 🏪 . We’ll change the way you look at chargebacks, forever.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store

🚀 The world's first fully-automated chargebacks solution for merchants 🏪 . We’ll change the way you look at chargebacks, forever.