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Published December 07th, 2016 by

With Chargebacks, Merchants & Consumers Both Pay the Price

Most merchants have at least some familiarity with chargebacks, and will understand the threat they represent to businesses. Consumers, on the other hand, remain almost totally unaware of the impact of chargebacks, leading some to take advantage of the practice. In many cases, consumers who abuse chargebacks do so without even realizing it.

Chargebacks Impact Merchants’ Sustainability

A startling majority of chargebacks—as much as 86% of all cases, as a matter of fact—are filed without proper justification. That’s a staggering figure, but the fact that it is so surprising further underscores how little we understand about this problem.

Unjustified chargebacks, commonly known as friendly fraud, thrive on a lack of understanding and standardization of practices between merchants, banks, card networks and cardholders.

This fast-growing threat source negatively impacts merchants in several ways. As chargeback expert Monica Cardone explains, “Not only do they lose the transaction value, merchandise, shipping costs, and chargeback fees of $10 to $40 per transaction, but high chargeback rates can jeopardize their ability to process credit cards and lead to substantial fines and penalties.”

If left unchecked, chargebacks can quickly devastate a merchant’s entire organization, regardless of whether they’re justified or not. Merchants are conditioned to accept chargeback reason codes at face-value, and to trust that whatever explanation these codes offer must be the truth. However, merchants cannot afford to accept chargebacks without investigating what motivated the cardholder to dispute the charge, especially given the severity of the consequences of friendly fraud:

Lost Revenue

When merchants experience chargebacks, the profits generated by the initial sale return to the customer’s hands. Assuming the customer has not already sent the merchandise back by the time the transaction is overturned, that customer now has no real incentive to take any further action. Thus, the merchant loses out on any potential for future profit they might have had by reselling that merchandise.

More Fees

Each dispute comes along with a chargeback fee assessed by the merchant’s acquiring bank. Typically falling somewhere between $10 and $40 for each dispute depending on the acquirer’s policies, this fee is intended to cover the cost of administration, but also has a punitive element as well. From the acquirer’s perspective, chargebacks represent a failure to comply with established policy and procedure on the part of the merchant.

Threat to Sustainability

Chargebacks don’t merely jeopardize merchants’ short-term profits—they also threaten their long-term sustainability. Card associations like Visa and MasterCard enforce chargeback thresholds on merchant members. If a merchant’s chargeback-to-transaction ratio exceeds this threshold (typically around one percent of total sales), the merchant acquirer will terminate their account. In truth, though, most acquirers will freeze or terminate merchants’ accounts well-before reaching that point.

Consequences for Consumers

Of course, while merchants face the most obvious consequences from excessive chargebacks, they are not the only parties who can suffer repercussions. When customers file chargebacks, they take on the possibility of unintended eCommerce blowback, and their actions may ultimately affect other consumers as well.

Individual Penalties

First, if an issuing bank believes their customer knowingly committed friendly fraud, not only will that transaction dispute be rejected, but the issuer may take punitive action against their own customer. After all, from the bank’s perspective, keeping a known fraudster as a customer represents a liability. Therefore, customers who repeatedly file and lose transaction disputes may face additional fees and penalties. The bank might even close their account altogether, regarding that customer’s business as too great a risk to continue accepting.

Higher Costs

When merchants experience more chargebacks, this causes their costs of operation to rise, and in turn, merchants will eventually be forced to raise prices to maintain their profitability. This ultimately impacts consumers when the cost of the goods they buy goes up. Therefore, the end victim of friendly fraud is, ironically, the consumers who initiated the transaction disputes.

What Can Be Done About Friendly Fraud?

To some, it may seem like attempting to resist the rising tide of friendly fraud is impossible; fortunately, that is not the case. There are steps that can help reduce general eCommerce risk, though such a feat demands a coordinated effort across the entire payments industry.

Reducing the overall burden of chargebacks requires:

Industry Organization

Regulations governing the chargeback process have seen very little change since the pre-internet age. It’s suggested that merchants consider joining a trade organization, such as the Merchant Risk Council (MRC) or the National Retail Federation (NRF), to lobby for more responsive industry regulations.

Raise Consumer Awareness

Most consumers are unaware that chargebacks have consequences for merchants or consumers. Educating consumers can make more people aware of how chargebacks negatively impact eCommerce merchants and consumers alike.

Retrain Consumer Behavior

Data from Visa suggests that at least 40 percent of all individuals who commit friendly fraud will do so again within 90 days. If merchants don’t dispute friendly fraud chargebacks, customers will quickly start to believe that friendly fraud has no consequences. Only by disputing these chargebacks can merchants retrain customer expectations.

Bring Chargeback Management into the 21st Century

If left unaddressed, friendly fraud will continue to get worse. Merchants need to take a proactive role in highlighting and changing consumer behaviors, as well as pushing to correct for the lack of standardization in chargeback policy.

This will be vital not just to protect merchants’ interest, but consumers’ as well. The sooner the implications of friendly fraud become common knowledge, the better-off everyone will be.

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