Sometimes customers engage in legitimate transactions but then later ask for their money back from credit card issuers. The industry term for this is chargeback. Chargebacks have a significant impact on the bottom line for financial institutions. According to Aite-Novarica group, there will be roughly 252 million chargebacks this year worldwide. Understanding the reasons behind chargebacks can help financial institutions keep them to a minimum.
In a survey, Aite-Novarica group polled 12 financial institutions and 300 merchants in the U.S. and UK about their experience with chargebacks. This research found that chargebacks typically fall into two categories: first-party fraud and transaction confusion.
In a recent webinar, the findings were discussed by Sandy Condellire, Senior Vice President of Security and Decision Product at Mastercard, Ranjita Iyer, Senior Vice President of Security Solutions and Processing at Mastercard, and David Mattei, Strategic Advisor at Aite-Novarica. They provided insight into what percentages of chargebacks are due to first-party fraud and to transaction confusion, discussed industry trends in fraud, and spoke about potential solutions to help minimize chargebacks.
Common Patterns in Chargebacks
The two primary causes of chargebacks are first-party fraud and transaction confusion — and they differ in important ways. “First-party fraud involves purposeful misuse of the charge-back system,” said Mattei. “Whereas in transaction confusion, a cardholder doesn’t recognize a charge on his or her statement.”
First-party fraud can happen for a variety of reasons. “Often, it’s to purposefully game the system. Sometimes it’s buyer’s remorse. But either way, cardholders are using chargebacks as a tool to get their money back for an otherwise legitimate purchase,” said Iyer.
In contrast, transaction confusion involves an honest mistake. “In the cardholder’s mind, they really do think the purchase was not theirs,” said Condellire. “Oftentimes, confusion comes from bill transactions which are unclearly labeled by financial institutions and interpreted as fraud.”
Findings From the Survey
In Ethoca’s research, respondents were asked what percentage of their chargebacks were due to first-party fraud and what percentage were due to transaction confusion. “Financial institutions were estimating 10% of their chargeback volume was due to first-party fraud,” said Mattei. “When we look at merchants though, that number grows. U.S. merchants estimate 23% of their charge-back volume is due to first-party fraud. For U.K. merchants, this estimate is even higher at 40%.”
When looking at transaction confusion, estimations look different. Financial institutions estimate transaction confusion causes 10%–39% of chargebacks, while U.S. merchants estimate it leads to 58% of their chargebacks.
Overall, first-party fraud is not the reason for most chargebacks. “Some 62% of financial institutions surveyed indicated first-party fraud chargebacks represent less than 10% of their total volume,” said Mattei. But the survey indicated that it is a growing issue. “More than half (57%) of financial institution executives indicated that first-party fraud grew from the first six months of 2021 to 2022,” he added.
Solving the Problem
Solving transaction confusion is easier than tackling first-party fraud, and something financial institutions can do today. “By providing additional details — like clear merchant names or logos, or even full digital receipts — this can help cardholders make better sense of their purchase history,” said Iyer.
That information needs to be clear and obvious on bank statements so that cardholders can better identify all their transactions.
“Issuers [have] been very successful in reducing dispute volumes by making more information — like clear merchant names, logos, and even digital receipts — available in digital bank channels,” said Condellire. “We’ve seen a reduction in overall disputes when more information is made available to customers. This also contributes to a reduction in call volume for ‘do not recognize’ calls into issuer call center channels.”
Fighting first-party fraud is harder and requires more data analysis and collaboration. A variety of information could be used to help confirm if a purchase was legitimate. “These data points could be about the payment device, including IP [internet protocol] address, device ID and device name, and device location. It could include customer details such as the account name or user ID, telephone number, or billing and shipping address,” said Iyer.
Collaboration between merchants and issuers will likely be part of the long-term solutions to first-party fraud. “We need to empower businesses to be able to share intelligence, and that comes from having more information to help identify good transactions sooner in the transaction process,” said Iyer.
Conclusion
The percentage of chargebacks due to first-party fraud vs. transaction confusion ranges significantly between regions and countries. Despite being a relatively small fraction of charge-back volume, first-party fraud is increasing and needs to be given the attention it deserves.
First things first, though: financial institutions need to go after the low-hanging fruit and reduce transaction confusion. This improves the customer experience and helps reduce chargebacks. It’s also likely to have other positive financial effects. Financial institutions that want to lead in the payments space will be wise to focus on reducing transaction confusion.
