If you're about to open a new shop, you must be aware of the ever-growing threat of credit card chargeback scams, which cost merchants significant losses that exceed original transaction amounts. Aside from losing the cost of the product or service they've already provided, they also face fees and penalties per chargeback.
Mastercard, for instance, says that in the U.S., the average chargeback value for merchants is $110. On top of this are the chargeback-related operational costs they incur. Technology is a primary driver, with merchants spending a staggering $100,000 to $500,000 on it yearly.
Don't let scammers get the better of you and your business. Familiarize yourself with how chargebacks, particularly "friendly fraud," can cost your business, and how to protect your firm from these fraudulent payment disputes.
What Are Valid Reasons for a Chargeback?
Not all credit card chargebacks are friendly fraud scams, but these "illicit" transaction reversals are widespread. Visa says friendly fraud accounts for about 20% of fraudulent disputes worldwide. The rate goes up to 30% in the realm of high-volume online merchants.
Most credit card chargebacks, however, have a legitimate reason, including the following.
Fraudulent Transactions
Fraudulent credit card transactions that are valid reasons for chargebacks occur when cardholders didn't authorize the purchase or transaction. They're common forms of card-not-present (CNP) issues, wherein malicious actors use stolen card information to rack up charges.
Experian points out that CNP attacks could result in significant losses for businesses, reaching an estimated $28 billion by 2026.
Billing Errors
Your customers can initiate a valid chargeback if a billing error occurs, such as if they get charged with an incorrect amount. Another legitimate reason is the presence of multiple charges for a single transaction, which can sometimes happen due to technical problems.
Valid Product Concerns
If customers have paid for a product they've never received, they can initiate a credit card chargeback. They can do the same if the item they've paid for gets delivered to them and is defective or not as described.
How Long Is Too Long to Do a Chargeback?
It depends, but under the Fair Credit Billing Act (FCBA) enforced by the Federal Trade Commission (FTC), consumers usually have up to 60 days from the receipt of the bill to file disputes, as noted by Investopedia. If you go beyond this, it may already be too late to do a chargeback.
There are, however, some cases wherein you may have up to 120 days to initiate a chargeback. A valid reason for such scenarios is if there's a problem with the quality of the goods you purchased or the services rendered to you.
How Are Credit Card Chargeback Scams Causing Merchants Significant Losses?
Credit card chargeback scams can wreak financial havoc on businesses of all sizes. The damage can be worse for small businesses, as these firms have tighter margins and lower revenues than bigger corporations. They can also lead to reputational damage and increased operational costs.
Significant Financial Losses
Each time merchants like you get hit with a chargeback, you'd likely lose the revenue on the disputed item or service. Unfortunately, you'd also have to shoulder the fees and penalties associated with the chargeback.
The more often chargebacks occur and the more severe they get (e.g., high dispute amounts), the more financial losses your business can suffer from, all of which can lead to insolvency.
Reputational Damage
While merchants are the victims of friendly fraud, they can still suffer from reputational damage if the same or other fraudsters leave dishonest negative reviews and claims online.
When that happens, a business can become associated with fraud. It can result in other customers deeming the brand or firm risky or unreliable.
Increased Operational Costs
Operational costs can soar due to credit card chargebacks, forcing merchants to give up precious time and labor to investigate these disputes. Businesses may then have to ramp up their workforce, as these investigations cause them to divert resources from core operations.
Any amount of time and work that a business spends fighting chargebacks is a resource spent not on nurturing the organization but just trying to protect it from losses.
What Can You Do to Prevent Chargeback Scams?
Credit card chargeback management is an effective solution against such fraudulent acts. It's a strategic collection of tools, techniques, and tactics that merchants can use to prevent friendly fraud and criminal chargebacks and eliminate those that arise from merchant errors.
Chargeback management entails transaction monitoring, data analysis, and fighting fraudulent disputes through representment.
Here are some specific examples you can apply to your firm's operations:
- Implementing fraud scoring
- Using card network verification tools
- Enforcing detection processes
- Using clear billing descriptions
- Sending immediate shipping updates and tracking information
- Using the more advanced 3D Secure 2.0 authentication
Frequently Asked Questions
Are Online Merchants More Vulnerable to Credit Card Chargeback Scams?
Yes. Online merchants are "easier" targets for malicious actors committing fraudulent chargebacks, as they operate in a CNP environment.
Unlike card-present (in-person) establishments, online businesses cannot physically verify the identity of the person placing the transaction. Neither can they confirm if the "buyer" is the cardholder or if the card is on their person.
Can Merchants Prevent All Chargebacks?
Unfortunately, you, as a merchant or business owner, can't prevent all chargebacks, as many situations can trigger them, but are out of your hands and outside of your customers' control.
An example is a delay in the items you've shipped due to extreme weather conditions. Nature-caused disasters (e.g., storms and floods) may even be so severe that your products may never reach their destination.
Disruptions to the supply chain caused by global threats (e.g., pandemics) are also out of your control.
Fortunately, many chargebacks, particularly those associated with fraud, are preventable with proactive management measures like stronger fraud scoring, card verification, and authentication.
Keep Credit Card Chargeback Scammers at Bay
Remember: credit card chargeback scams are becoming more common. It should be enough reason for you, as a merchant, to be proactive in preventing and fighting them, as they can cost your business a lot.
The sooner you implement chargeback management strategies, the sooner you can reduce your risk of suffering from financial losses, reputation damage, and increased operational expenses.
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