Why do customers dispute the purchases they make? What are the reasons for chargebacks? Can you prevent disputes if you know what causes them? Should a customer’s reasoning for the chargeback impact how you respond to it?
Chargeback management is a complicated topic that often involves a lot of confusion. In order to help remove those complexities, we’ve come up with a simplified way to explain why chargebacks happen.
There are three main reasons for chargebacks. Understanding what those reasons are can help you prevent and fight chargebacks with greater accuracy.
- Merchant Error
- Criminal Fraud
- Friendly Fraud
Before We Begin…
It’s important to note that the reasons listed here are a simplified explanation of why chargebacks happen. The intention is to help you better understand the rationale and motives behind disputes.
The card brands (Mastercard®, Visa®, etc.) have official reason codes that are used to classify chargebacks. The categories listed in this article are not officially recognized by the brands — they are a generalization that will hopefully help you create effective management strategies.
1. Merchant Error
Merchant errors happen when you make mistakes while processing transactions, fulfilling orders, or navigating the customer experience. If you don’t proactively try to fix your mistake, a customer will most likely file a chargeback.
The following are some examples of merchant errors.
Monica thought she was issuing the customer a credit but she debited the account instead.
Joey accidentally shipped a blue t-shirt instead of a green sweater.
Phoebe was supposed to cancel a customer’s subscription but she forgot.
Can I Prevent Merchant Errors?
Of the three chargeback reasons, merchant error is the easiest to prevent. All you have to do is carefully, objectively, and consistently review your business’s practices, processes, and policies. Then, fix any problems you find.
Here are a few examples.
- Check your marketing strategy. Be flattering, but honest. Don’t over promise or be deceptive.
- Review payment processing requirements. Use the authorization process when it’s appropriate. Comply with Dynamic Currency Conversion rules. And don’t charge the customer’s card until you are ready to ship the merchandise or perform the service.
- Ensure your refund or cancellation policy is customer friendly. Write clear, concise policies and make sure they are easy to find. Fulfill refund requests promptly. And train staff so credits don’t accidentally become debits.
- Optimize order fulfillment. Make sure your delivery timeline estimates are accurate. Ship merchandise in the correct sized box and with sufficient packing material so items won’t break during transit. Make sure staff are trained and familiar with your product offerings so the correct merchandise is shipped every time. And carefully monitor inventory so customers don’t try to purchase out-of-stock goods.
Sometimes, it can be difficult to detect mistakes and recognize merchant errors. To increase the efficiency and accuracy of your internal audits, try analyzing your chargeback data. Data analysis helps reveal the underlying issues that might cause a customer to dispute a charge. Then, you can solve those problems at their source.
Can I Fight Merchant Error Chargebacks?
Unfortunately, if you made a mistake, you should accept responsibility for it. And if you are responsible for the unsatisfactory customer experience, you are probably also liable for the resulting chargeback — and unfortunately, the chargeback fees.
Usually, you shouldn’t fight chargebacks that result from merchant error. The only situations where you might want to challenge a dispute is if it is invalid — for example, it was initiated after the time limit or otherwise doesn’t adhere to card network rules.
However, figuring out what you should and shouldn’t fight can be difficult — unless you use a chargeback management platform like Kount.
2. Criminal Fraud
Criminal fraud happens when someone steals another person's card number or account information and uses it to make a purchase without the cardholder’s permission. Because these transactions are unauthorized, they typically result in chargebacks.
The following are some examples of criminal fraud.
A criminal purchased a list of account numbers from a data breach and used Rachel’s credit card information to buy dozens of computers to resell on the black market.
A woman found Chandler’s debit card lying on the sidewalk and used it in an online shopping spree to buy herself a new wardrobe.
An old roommate hacked into Ross’s account at his favorite pizza place and used stored payment information to buy his friends a feast.
Can I Prevent Criminal Fraud?
Fortunately, there are several tools and techniques that you can use to reduce the risk of criminal fraud.
- Professional Fraud Services - There are several vendors — like Kount — that can help you monitor shopper behaviors, detect potentially fraudulent activity, and block transactions that will likely result in chargebacks.
- Address Verification Service - AVS compares the billing address provided by the shopper during checkout to the cardholder’s billing address on file with the issuing bank. A mismatch could indicate an unauthorized person is attempting to use the card and the transaction should be declined.
- Card Security Codes - Requesting the card security code (CVV2, CVC2, etc.) during checkout helps confirm the shopper has physical possession of the card. An incorrectly entered number could indicate a criminal has gained access to the account number and is using it without permission.
- 3D Secure 2.0 - 3DS 2.0 uses a combination of transaction-specific information (like shipping address) and contextual information (such as order history) to verify the identity of the shopper.
You should also review these red flags, and be on the lookout for suspicious activity. There are several warning signs that fraudulent transactions usually have in common.
Can I Fight Criminal Fraud Chargebacks?
Criminal fraud is one of the reasons why chargebacks were invented. Chargebacks are a safeguard that ensure cardholders aren’t liable for transactions that weren’t authorized.
Unfortunately, if a chargeback is the result of true criminal fraud, you shouldn’t fight it. Card brands place the burden of fraud protection on merchants. If you are unable to detect and block criminal activity, then you are liable for the financial losses.
However, it’s important to note that criminal activity is actually a relatively minor threat for most merchants. On the surface, it might seem like criminal fraud is to blame, but the real chargeback reason is usually “friendly” fraud — and you definitely should fight friendly fraud chargebacks.
3. Friendly Fraud
A case of friendly fraud happens when a cardholder uses the chargeback process incorrectly, either as an intentional attempt to get something for free or an innocent misunderstanding. Friendly fraud is usually the most common chargeback reason.
The following are some examples of friendly fraud.
Gunther forgot to cancel his membership before the free trial period ended. When his account was charged, he was irritated by the unplanned expense. So Gunther called the bank to dispute the transaction.
After buying an expensive purse, Janice suffered from buyer’s remorse. Rather than contact the merchant to return the purse for a refund, Janice opted for a chargeback because it was more convenient.
Richard didn’t recognize a business name listed on his credit card statement and couldn’t remember buying anything. When he suggested it might be fraud, the bank issued a chargeback.
Can I Prevent Friendly Fraud?
Unfortunately, it is pretty challenging to prevent friendly fraud.
The other two chargeback reasons can be traced to very obvious causes — criminal activity and merchant mistakes. But friendly fraud is much more ambiguous. It is caused by things like beliefs, opinions, morals, regrets, fear, and confusion. It is nearly impossible to anticipate a customer’s reaction to a situation and incredibly difficult to change that reaction to something less destructive than an illegitimate chargeback.
However, there are some things you can do to reduce the likelihood of friendly fraud — especially accidental cases caused by confusion — and limit the impact these chargebacks have on your business.
- Review each product or service you offer. Make sure everything you sell is high quality. Write accurate, detailed, and helpful product descriptions so customers know exactly what they are getting.
- Test your billing descriptor. Your billing descriptor should make it easy for customers to recognize their purchases on their credit or debit card statement. Use a brand name or phrase that customers are familiar with instead of a legal or “doing business as” name to avoid customer disputes. Check how your descriptor displays with different card brands (Mastercard, Visa, etc.) and different card types (credit, debit, etc.).
- Remind customers of recurring payments. Send notices before processing transactions associated with subscriptions. Give customers the option to cancel if necessary.
- Provide exceptional customer service. Answer emails promptly. Monitor social media and respond to comments. Reduce call wait times so customer concerns are addressed quickly.
- Sign up for order validation services. Tools like Order Insight and Consumer Clarity enable you to share detailed transaction information with an issuer in real time. When a cardholder contacts the bank to dispute the charge, the issuer can review the information you provide and hopefully clarify the transaction to stop the friendly fraud.
- Consider using prevention alerts. If you are worried about your chargeback-to-transaction ratio, prevention alerts might be a valuable tool for your business. Prevention alerts give you the opportunity to refund disputed transactions before they become chargebacks. Alerts can’t stop friendly fraud from happening, but they can reduce the risk of threshold breaches and protect your merchant account.
Can I Fight Friendly Fraud Chargebacks?
Of the three reasons for chargebacks, friendly fraud is usually the only one that can be fought. Not only are you allowed to fight friendly fraud, you are actually encouraged to do so.
Fighting chargebacks has five very valuable benefits. The most important benefit is recovering revenue that has been unfairly lost so you can protect your bottom line.
Manage All Chargeback Reasons With Kount
If you’d like to efficiently and effectively manage chargebacks, contact Kount today.
We can help you create a comprehensive management strategy, one that addresses all reasons for chargebacks, so you’ll achieve the most profitable results possible.
Sign up for a demo today to learn more.