Online merchants rely heavily on various payment methods such as credit and debit cards or PayPal. While these payment options provide convenience and streamline customer progress through the sales funnel, they’re also reversible in specific scenarios — which can have a profound impact on revenue.
Chargeback fraud occurs when a customer contacts their card issuer or payment processor platform in order to dispute a charge to their account. In contrast with disputes raised with merchants, chargebacks are executed between the customer and their provider.
By disputing legitimate charges, some customers attempt to reverse purchases after they’re received an item, product, or service. Cardholders, for example, may claim that their product never arrived or that they never made the purchase.
It can be extremely difficult for online merchants to prove that the purchaser did indeed receive the service or product ordered — in most cases, card providers will execute a chargeback and side with the customer in a dispute.
If you’re an online retailer or you operate an eCommerce platform, it’s likely that you’ve got the revenue loss incurred from chargeback fraud. There are, however, a number of practices that can be used to mitigate chargeback fraud.
The Growing Problem of Chargeback Fraud
Chargeback fraud isn’t a small problem — statistical data reveals that chargeback fraud costs businesses around the world over $25 billion annually, and accounts for over 30 percent of all online business losses.
The rate at which chargeback fraud occurs is increasing. Between 2017 and 2018, chargeback fraud instances worldwide increased by 41 percent.
There are a number of causes that contribute to chargeback fraud. Chargebacks can arise from vague or difficult to understand refund guidelines, complicated shipping processes, or inaccurate product descriptions. A large portion of chargeback fraud instances, however, are caused by bad actors seeking to defraud eCommerce platforms.
How Chargeback Fraud Works
The primary reason chargeback fraud occurs at such a large scale is the complicated dispute process. Chargeback fraud disputes typically take a long time to resolve, with some card providers taking several weeks to mediate and resolve them.
The chargeback process begins with a customer disputing a charge with their card or payment platform provider. Card processors have over 150 different chargeback codes, but these codes commonly fall into one of three categories: a product or service wasn’t received, wasn’t as advertised or described, or the transaction itself was unauthorized.
Card providers review the chargeback request and, if approved, the chargeback results in a credit on the customer’s account and a debit from the merchant’s account. Merchants that are hit with chargebacks are often also required to pay a chargeback fee, increasing total losses. Concerningly, chargebacks can be made between 180 and 540 days depending on the card provider.
How Merchants Respond to Chargebacks
The most common response from merchants that receive a chargeback is no response at all. Many merchants, aware of the time-consuming nature of chargebacks, choose to ignore chargeback notifications and disputes.
Providing evidence that products or services have been delivered to customers can be complex. In order to prove that a chargeback has occurred, merchants are typically required to provide shipping details, billing or invoice details, delivery verification, device fingerprinting, past transaction history, and more.
The best method of reducing the impact of chargeback fraud on your business is to prevent it before it happens.
How can you prevent chargeback fraud, though?
1. Follow the Correct Procedure for Card-Not-Present Transactions
Purchases made online are categorized as “card-not-present” transactions, which force merchants to follow different best practices when compared to retail purchases made in person.
Businesses accepting card-not-present transactions should use a secure eCommerce platform and engage a reputable payment processor that provides seller protection and anti-fraud functionality.
Address verification services, or AVS, are a powerful tool provided by these platforms that can minimize chargebacks. AVS functions by matching the provided billing address of a customer with card providers, minimizing chargeback disputes based on delivery failure.
2. Set Up an Accurate Payment Descriptor
Charges made to a customer’s credit or debit card will appear on their statements with a payment descriptor. This descriptor should match the legal business name of your online business — if you’ve changed your business name at any point, chances are your payment descriptor doesn’t match and is contributing to chargeback fraud.
Inaccurate payment descriptor information is a leading cause of “friendly” chargeback fraud and occurs when customers don’t recognize a charge on their statement.
If you’re not sure whether the legal name of your business aligns with your payment descriptor it’s best to engage in accounting services. Professional advice will assist you in ensuring your business is as transparent to customers as possible, minimizing the frequency of chargeback fraud instances.
3. Consider Accepting Cryptocurrency as a Payment Method
A growing number of online businesses are choosing to accept cryptocurrencies such as Bitcoin, Ethereum, and DASH as a payment method. Cryptocurrencies are now accepted as a payment method by major enterprise organizations such as Microsoft and WordPress and offer a wide range of advantages over card payments or PayPal if configured correctly.
Cryptocurrency transactions are typically made available to merchants within 30 minutes for major cryptocurrencies such as Bitcoin. Payment-focused cryptocurrencies such as DASH offer instantaneous transaction execution.
Most importantly, cryptocurrency transactions can’t be reversed or disputed. The fee structure for cryptocurrencies is also extremely low, with transactions costing as little as a fraction of a cent.
The cryptocurrency ecosystem also provides merchants with a diverse range of exchange platforms that can be used to trade crypto for fiat instantly. These platforms, such as Rubix.io, allow businesses to store cryptocurrency generated from their business securely or dispose of it in a streamlined manner without compromising their business data.
Chargeback fraud can be a major headache — but it doesn’t have to be. By following best practices for card-not-present transactions, designating corred payment descriptors, and offering customers the option to pay in irreversible digital currencies, it’s possible to significantly reduce the financial impact of chargebacks.