Chargebacks play an essential role in consumer protection by providing customers with recourse when they feel they have been wronged by a purchase. Since the signing of the U.S. Fair Credit Billing Act of 1974, consumers have had a legal basis to dispute credit card charges. If a customer feels they were the victim of fraud, misrepresentation, or unauthorized charges, they can file a dispute with their issuing bank. While innocent by design, chargebacks have been increasingly abused in recent years, with global chargeback costs estimated to reach over $125 billion. Companies have struggled to keep up with the chargeback epidemic and, in a down economy where margins are razor thin, chargebacks can cause any profits to quickly evaporate. Fortunately, there are steps that businesses can take to protect their bottom line and recover lost revenue.
Table of Contents
Friendly fraud – A ubiquitous problem for businesses
The most pervasive type of chargeback, known as friendly fraud chargeback, occurs when a customer files a chargeback for a purchase they willingly made. This could be because they were unhappy with the product or service, had buyer’s remorse, or simply forgot that they authorized the purchase. While many friendly fraudsters assume that their actions are victimless, the truth is that businesses suffer greatly when friendly fraud occurs. Chargebacks are not only costly and time-consuming to resolve, but they also result in lost merchandise, increased shipping expenses, and chargeback fees from the acquirer or processor. It’s estimated that the true cost of a chargeback for a $100 purchase is over $200 after accounting for fees, and operational and marketing costs.
The rapid growth of friendly fraud can be attributed to the convergence of several trends over the past decade. The most significant catalyst has been the surge in eCommerce sales, which are expected to account for nearly a quarter of total global retail sales by 2025. This shift in consumer behavior has made it easier for friendly fraudsters to commit chargeback fraud, as they can file a chargeback without ever having to speak to the merchant. Once customers realize they can usually get away with filing a chargeback without any consequences, friendly fraud becomes an attractive proposition, especially during times of economic distress. The Covid-19 pandemic compounded this problem as consumers turned to online shopping out of necessity. Between January and June of 2020, the number of friendly fraud cases more than doubled and currently accounts for over 80% of all chargebacks.
At the same time, the use of credit and debit cards has grown exponentially, with over 95% of Canadians now owning at least one. The rapid increase in payment card transactions has led to a corresponding increase in chargebacks. The growth of eCommerce and the increase in payment card usage has also coincided with a decline in customer service. With businesses cutting costs to stay afloat, many have reduced customer service staff or outsourced these operations to call centers overseas. As a result, consumers are often left feeling frustrated and powerless when they have an issue with a purchase. When they can’t get their issue resolved through traditional channels, they turn to chargebacks as a way to get their money back.
How chargeback resolution services can help
Chargeback resolution services are companies that represent retailers, working to get merchant chargebacks reversed in their favor. With 40% of consumers repeating friendly fraud within just 60 days, these services have become essential for companies struggling to keep up with the chargeback epidemic, as they provide the expertise and resources needed to win cases. More advanced chargeback solutions, like Just’s, go beyond the basics of chargeback mitigation. Just leverages the power of automation and AI to optimize merchant re-presentment across multiple variables that affect the likelihood that a rebuttal letter will be accepted by the issuer. In doing so, they can greatly improve their success rate of overturning illegitimate chargebacks and help prevent future chargebacks from occurring in the first place.
By employing chargeback mitigation services, merchants can also reduce the labor costs associated with chargeback processing while recovering lost revenue and improving their overall chargeback rate. For the rapid growth fintech company Melio, this meant reversing 85.5 percent of chargebacks during the first 12 months after deploying Just’s solution – a 55 point increase. Using Just’s expert evaluation of their checkout process and data provided by Just on the reason codes for their legitimate chargebacks, Melio was able to drastically improve its chargeback rate and focus its efforts on their company’s core mission. With the revenue saved by leveraging chargeback resolution services, companies are less likely to divest resources from mission-critical areas of the business like customer service – which can help reduce friendly fraud in the first place.
Choosing the right solution
While the benefits of working with a chargeback re-presentment company are clear, it’s important for merchants to choose the right partner to represent their business. To be successful, the chargeback resolution company should have a deep understanding of the nuances of chargebacks and re-presentment, as well as the ever-changing card network rules. The most effective chargeback resolution services help merchants identify the origin of their chargebacks so that they can take steps to prevent them from happening in the first place. Before making a selection, merchants should evaluate the company’s re-presentment success rate, its ability to tailor its solution based on business need, and the breadth and depth of its chargeback data analytics. With the right chargeback solution in place, merchants can take back control of their business and start winning the fight against friendly fraud.
The bottom line
In times of economic hardship, chargeback resolution services provide a much-needed lifeline for companies struggling to keep up with the increased volume of chargebacks. By automating the re-presentment process and optimizing it across multiple variables, these services can help merchants recover lost revenue, improve their chargeback rate, and focus on their core business without being forced to perform company-wide layoffs during a down period in the global economy. In an era of digital commerce, where chargebacks have become an inevitability, chargeback re-presentment services are no longer a luxury – they’re a necessity.