The Chargeback Spectrum

In the first blog in this series we discussed the recent surge in chargebacks, and the evolving consumer expectations that are driving this rising trend.

In this blog, we’ll take a more detailed look about what we mean by a chargeback. A chargeback is the reversal of a payment, usually instigated at the behest of a consumer and carried out by their bank or card issuer. But that simple description, while accurate, doesn’t do justice to a wide spectrum of possible chargeback causes.

Operationalizing chargeback management can be a consistent challenge and our own research has found that many merchants don’t bother to fight chargebacks, and simply take the financial hit. Part of the reason for this is a lack of resources, incomplete knowledge of the guidelines to representment, or they view the costs as simply too high for the return.

Forewarned is forearmed. Merchants with an understanding of the spectrum of potential chargebacks have a better chance of identifying which chargebacks are worth fighting.

50% of chargebacks for digital merchants are thought to be the result of friendly fraud.

Friendly and unfriendly fraud

Part of the confusion around chargebacks comes from the terminology used to describe it. A chargeback can be friendly (a customer disputing a valid transaction) or fraud (a criminal compromised a credit card and used it to make fraudulent purchases). But even if it’s friendly, it can be an unhappy customer gaming the system, or the result of error or confusion.

Friendly fraud, or first-party misuse, is a huge and growing problem. It might involve a case of buyer’s remorse or an unrecognized transaction description on a statement. Both often end in a chargeback.

This is either blatant cyber theft or, at best, gaming the system, but an increasing amount of first party – fraud results from genuine error. To put friendly fraud into perspective, our own research has found that 48% of merchants think 1/4 of all fraud is the result of customer confusion.

It’s important for merchants to recognize these very different chargeback types, so they don’t confuse payment fraud with honest consumers who have made a genuine mistake.

First and third-party fraud

Whether they’re down to confusion, buyers remorse or playing the system, these instances are usually known as first-party fraud. That simply means the fraud – deliberate or not – is perpetrated by a consumer rather than a third-party fraudster.

There is no ambiguity about the causes of third-party fraud, which tends to involve stolen credit cards or synthetic identities. It is a serious crime that can result in substantial losses for merchants.

Chargebacks require a targeted approach

To summarize, a chargeback can be the result of multiple causes. It might be a parent not recognizing charges made by their child. It can be from a fraudster maxing out a credit card or an organised criminal gang maxing out a stash of stolen credit cards.  Regardless of the reason, the merchant loses out – in terms of inventory, money and administrative effort.

The first step in fighting back against the chargeback surge is developing policies to tackle friendly and unfriendly fraud in the most appropriate way. In the next article, we’ll look at how that’s done, and explore the very latest strategies for fighting chargebacks.

Do you need a chargeback management solution?

Integrated chargeback management is essential so you can respond to disputes in a timely manner. Accertify’s chargeback solution streamlines data collection, providing automated tools that make it easy to determine the necessary steps for chargeback representment.