June 17, 2020

Chargebacks are not limited to certain industries or size of business – they can impact a business at any time and significantly reduce revenue.

A chargeback or “dispute” is the reversal of a credit card charge that comes directly from a customer’s bank. In a typical situation, a customer notices a charge on their statement that they don’t recognize. They decide to call the bank to contest the charge rather than the originating business. The bank refunds the customer. In a card not present transaction, like eCommerce purchases, the digital business bears the financial impacts of repaying the customer and faces fees from the issuing bank.

Data according to the Paypers.com

An increase in chargebacks can be caused by multiple factors. The rise of digital shopping as a result of the coronavirus pandemic means that more consumers are shipping items directly to their homes. They are also buying via Buy Online Pick Up In Store. As a result, it’s easier for customers to claim there is an issue with an order if the purchase took place online.

In addition, many businesses that haven’t previously engaged in a high level of eCommerce are now experiencing chargebacks and fraud, as new digital players are often targets for fraud.

Some chargebacks are legitimate, but others can be caused by criminal or friendly fraud.

What are the types of fraud that can result in chargebacks?

  • Criminal Fraud: Stolen credit card accounts are used to fraudulently obtain physical goods, digital goods, or services. This type of fraud is increasing twice as quickly as eCommerce sales and accounts for approximately two out of three chargebacks.
  • Legitimate Disputes: Problems with merchant setup, transaction data, order processing, or shipping delays can result in poor user experience or consumer confusion — and lead to chargebacks.
  • Friendly Fraud: A consumer makes a legitimate purchase with their credit card and then enters a dispute with the issuing bank rather than requesting exchanges or refunds from the merchant. It can be malicious, but more often arises from a misunderstanding.

Why is Friendly Fraud a Significant Piece of the Chargeback Puzzle?

Not all friendly fraud is the same and there may be several different reasons why friendly fraud occurs.

  1. Accidental friendly fraud: A consumer made a purchase but doesn’t recognize it due to limited information on a bank statement.
  2. Intentional friendly fraud: A consumer made a purchase and recognizes the purchase, but still requests a credit from the issuing bank, claiming they did not make the purchase.
  3. Merchant error: A merchant doesn’t provide adequate support to avoid a chargeback. This can include limited merchant descriptors on a bank statement, poor customer service, etc.
  4. Shared card fraud: Many consumers share a card with family members. As a result, if one person uses the card and doesn’t inform the other, this can lead to friendly fraud.
  5. Policy abuse fraud: Allows users to return items within a certain time limit without needing to provide a reason. It does not typically limit the number of times you can return or request a refund. However, many companies take action if they feel a shopper is abusing the policy.
  6. In-flight chargeback: When a business issues a refund, the time it takes to process could be several days to several weeks, however consumers expect the refund to be instantaneous. When the refund isn’t quick enough, the customer often calls the bank and it can be refunded twice.

To help businesses alleviate the impacts from friendly fraud, and isolate why and how it occurs, Kount has introduced a Friendly Fraud Prevention Solution that provides a complete platform to protect against both friendly and criminal fraud. The solution accurately identifies criminal fraud, friendly fraud, and legitimate disputes.

Costs of Chargebacks: Credit Card Fraud Monitoring Programs and Thresholds

Businesses need to keep a close eye on their chargeback rates. Credit card processors have monitoring programs to compel merchants and acquirers to reduce chargeback fraud and/or dispute levels. A chargeback rate is a calculation of the number of chargebacks against the volume of sales. Each card processing network has specific protocols for handling card-not-present transactions.

Merchants placed in excessive chargeback programs typically have three months to address their chargeback rates or present a plan for doing so. Once a plan is created, they may have a compliance window of three to six months. In the worse-case scenario, the card brand could eliminate a merchant’s account and they would no longer be able to accept payments.

Visa announced several major changes to its Dispute and Fraud Monitoring Programs on October 1, 2019. These changes place more responsibility on merchants to manage their chargeback prevention strategies.

The lag in chargeback reporting can hide fraud. Due to the sometimes 60-90-day lag time, businesses may not know they have a fraud problem. And, it means financial reports will show an inaccurate picture of a company’s performance.

Successful Fraud Protection Solutions Include Essential Capabilities

An all-in-one enterprise-grade solution can address all fraud prevention needs and dramatically reduce chargebacks if it includes criminal fraud prevention, friendly fraud prevention, account takeover protection, case management, policy creation and management, and advanced data analytics.

Prevent Chargebacks with Identity Trust and Advanced AI

Kount’s AI-driven fraud prevention solution is easy to implement and use and delivers the most accurate eCommerce fraud protection. It evaluates transaction risk with the following capabilities:

  • An extensive network of trust and fraud related signals
  • Advanced AI and machine learning
  • The ability to create, edit, and test business policies
  • A case management tool for manual reviews
  • Reporting and analytics to evaluate everything from macro trends to a single transaction
  • An orchestration hub for third-party integrations

Establish Identity Trust with the Largest Network of Trust and Fraud Signals

Kount’s Identity Trust Global Network uncovers the true level of trust behind interactions where other solutions often miss fraud or create false positives and unnecessary friction due to limited datasets and lack of real-time AI.

The largest data network of trust and fraud-related signals drives quick and accurate trust decisions, linking signals from payments data, location ID data, digital identifier data, and unique customer data.

From a website visit to login, checkout, or account creation, Kount’s Identity Trust Global Network goes to work analyzing billions of identifiers to establish real-time links between identity elements in order to return identity trust decisions that provide the desired customer experience — ranging from low friction to blocking fraud.

Kount’s solution can be deployed based on business needs, resources, and budgets. It can be adapted to establish policies that meet unique business needs and risk thresholds to address emerging attack methods, new use cases, and other fraud-related chargeback issues.

Learn more about reducing eCommerce chargebacks and fraud costs in this eBook

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