Chargebacks—payment disputes filed by customers because of real or alleged fraud—have always been a costly challenge for e-commerce businesses, but the way chargebacks affect businesses is changing.
Costs are now the biggest chargeback-related problem for half of online retailers because chargebacks are increasingly expensive. At the same time, fraud that leads to chargebacks is getting harder to detect because the nature of fraud is evolving. More previously trustworthy consumers are committing friendly fraud, which is now a “significant or moderate concern” for more than half of businesses.
Understanding the underlying trends that are fueling chargebacks now can help retailers update their prevention and management strategies to meet the moment. Knowing what new resources are available can also help online sellers successfully avoid or dispute chargebacks to reduce fraud and control costs.
A recent report found that friendly fraud rates in 2023 reached levels similar to those in 2020, when there was a spike in e-commerce friendly fraud driven by layoffs and economic uncertainty. The same report found that three-quarters of consumers assume that chargebacks and merchant refund requests are basically the same thing, meaning many shoppers who file chargebacks in lieu of return requests don’t realize they’re committing fraud.
The Limits of Responses to Chargebacks
Prevention is the ideal way to deal with chargebacks, but treating returning customers as potential fraudsters to avoid friendly fraud can create bigger problems. Many businesses already err on the side of caution so much that they decline a high volume of good orders. U.S. based ecommerce businesses were expected to lose $157 billion to false declines in 2023, while global e-commerce losses to fraud were expected to reach $48 billion. Among U.S. and Canadian online shoppers who took part in an e-commerce shopping survey, 13% had experienced online fraud in the past year, but 18% experienced a decline.
False declines deprive businesses of order revenue and they create a deeply negative experience for customers. More than a third (37%) of those consumers will boycott a site after a false decline, and 25% will complain on social media about the site, creating ongoing lifetime value losses and higher customer acquisition costs.
Once a chargeback is filed, the only alternative to paying it and the associated fee is to dispute it. However, this requires employee time and resources to respond within the card issuer’s time limit—and the limit varies by card company. Depending on the amount of the chargeback and the resources required to dispute it, businesses may lose money in the short term by fighting chargebacks.
However, a high chargeback ratio over time can prompt banks to charge businesses higher transaction processing fees, withhold cash reserves, or even close accounts with minimal notice. As a result, fighting chargebacks is a necessity, even if the process can’t recoup all the losses a chargeback creates.
What Card Brand Changes Will Mean for Chargeback Management
There is some relief on the way for businesses. One hard-to-dispute reason for chargebacks is a mismatch between a payment card’s CID (or CVV) number and the number entered by the customer. Often, mismatches will result in a decline because if the order is approved, the business is liable if the customer later files a chargeback.
American Express is changing its CID mismatch policy in April 2024. At that point, the liability for approved CNP orders with a CID mismatch will shift to Amex rather than the business. Amex says it’s making this change because CID data entry errors often cause customers to abandon carts rather than re-enter their data, so the liability shift will create a better customer experience and help businesses approve more orders. As of this writing, there’s no word from Visa or Mastercard on any plans for similar changes.
What’s AI’s role in Chargeback Management?
Because there’s been so much discussion in the media about how generative AI can help solve business problems, it’s worth addressing here. The short answer to questions about the role of AI in fraud prevention is that AI has already been a part of advanced anti-fraud solutions for some time now. When AI is trained on specific data sets, it can quickly “learn” what good orders look like and what aspects of an order or customer profile pose a higher fraud risk within a context that can include market, vertical, time of year, type of product, and much more. These kinds of AI-based solutions are faster and more accurate than rules-based solutions that use static data, which tend to generate a high rate of false positives.
As for gen AI, it’s too early to apply this technology to fraud prevention with a high degree of confidence. Concerns about gen AI’s accuracy, its propensity to generate false or made-up results, and the potential for exposure of protected information need to be addressed before this technology finds its place in the fraud-prevention toolbox.
Best Practices for Chargeback Prevention and Management
The specifics of fighting chargebacks will change as fraud tactics, prevention tools, and card brand rules evolve. However, there are three general practices that retailers and other online businesses can adopt and adapt over time to reduce chargebacks and challenge them more effectively.
Review your customer experience for chargeback triggers. Customers sometimes file chargebacks because it’s faster and easier to make a request with their card company than it is to request a return or refund from a business. To avoid chargebacks of convenience, make sure customers can easily find return information and support.
Providing delivery tracking and confirmation can reduce chargebacks based on claims of non-delivery, and making sure your business name appears accurately on credit card statements can reduce chargebacks based on misunderstandings.
Keep your chargeback prevention tools current. AI-powered order screening tools can help identify fraud risks in real time from new and returning customers. This matters because, as we’re seeing with the uptick in friendly fraud, formerly good customers can go bad, and relying on static rules or internal approved lists can expose your business to this type of fraud. Expert review of orders that score high on fraud risk can verify fraud attempts and avoid false declines. both of which are important for revenue and customer retention. If you don’t have the in-house resources to devote to contesting chargebacks, consider working with a third-party mitigation service provider to handle them.
Stay up-to-date on chargeback guidelines and fraud prevention news. Keep up with the latest developments in the chargeback space, especially bulletins and press announcements from the major card issuers and digital wallet providers. This can help you understand current chargeback disputation requirements, processes, and deadlines.
Finding ways to prevent chargebacks and dispute them successfully can help your business now, by allowing you to approve more orders and bring in more revenue. Proper chargeback management can also help your business over the long term by helping keep transaction processing rates low, providing a good customer experience, and earning more lifetime value from those customers.
