Where Do Chargebacks Come From?

See below for reasons for a chargeback dispute:

1. A cardholder makes a purchase, then suffers from “buyer’s remorse,” regretting the purchase but not really wanting to confront the merchant.
2. The consumer claims that the transaction is unauthorized and files a chargeback.
3. The bank issues a chargeback with a fraud-related reason code, and the merchant accepts this reasoning.
4. The merchant takes the reason code at face value, and feels the need to beef up fraud prevention tactics, making the checkout process more difficult for other users.
5. The chargeback itself was trouble enough, but now things get worse. Not only are the extra fraud detection efforts unwarranted, the added friction causes the merchant to lose legitimate business.
6. Worst of all, because the transaction was authorized and friendly fraud was the real culprit, the merchant is doing nothing to resolve the true issue …meaning the problem will keep occurring.

For the merchant, there is lost revenue, lost merchandise and annoyed customers.

Once merchants have detected the true cause of transaction disputes, they can begin implementing prevention practices to stop the revenue loss. At this point, they are fighting the problem itself, not just the symptoms.

The Cost of Chargebacks

1. A chargeback can cost the merchant anything ranging from £20 to £100 per chargeback. These fees are put in place to cover the costs of the chargeback process.
2. The costs of processing the transaction, including the interchange fee, are wasted. If the merchandise was shipped, the chargeback amount will also include the shipping and handling.
3. The merchant also loses the cost of the goods Merchandise associated with a chargeback and it is rarely returned to the merchant, so the merchant forfeits the money spent on the item and any potential for future profitability.
4. Chargebacks allow banks to forcibly remove funds from the merchant’s account. Unless the merchant’s re presentment case is successful, that revenue is lost forever. How much is being lost? The average merchant suffers 206 fraud-related chargebacks per month, costing on average  £130 each.
5. Merchants can choose to dispute the chargeback, but that is an expensive, time-consuming, labor-intensive process, wasting even more of the merchant’s resources.
6. Finally, excessive chargebacks also increase the odds of a terminated merchant account, leading to placement on the MATCH list (also called the Terminated Merchant File). The result of this being that the merchant be labelled as high-risk and therefore would require a high risk merchant account, with extra fees, possible rolling reserves, high setup costs and more.

The Most Important Step to Reduce Chargebacks

The very first step in reducing chargebacks is determining the actual chargeback reasons, or triggers. Despite the numerous reason codes used by card networks to categorize a chargeback, there are really only three true sources:

Criminal Fraud: Also known as credit card fraud, this is where criminals gain access to credit card information and make unauthorized transactions. More than half of all chargebacks are blamed on credit card fraud, but less than 10% of chargebacks are actually due to criminal activity.

Merchant Error: Faulty business practices, unchecked policies, processing errors—there are several merchant missteps that can cause chargebacks.

Friendly Fraud: Also known as chargeback fraud, this practice is sometimes due to lack of understanding on the part of the consumer. Many times, however, it is a form of “cyber shoplifting.” Savvy shoppers detect and exploit loopholes in the chargeback process to game the system and secure an undeserved, no-hassle refund and this practice is increasing rapidly.

The key is to keep a log of all transactions that come through to the business, record calls where possible, use fraud prevention tools that are available through certain payment gateway providers and stay in communication with the end consumer if they have any concerns regarding the products that have been shipped out. This way the merchant has a better case for defending chargebacks.

Rav Bains

Rav Bains is the founder and senior payments consultant at We Tranxact. He helps UK and European businesses compare merchant accounts, card machines, ecommerce gateways, virtual terminals and specialist payment routes. His work covers everyday retail and online payment needs as well as more complex sectors, with a focus on provider fit, transparent commercial terms, underwriting readiness and practical support.

See Full Bio