Do You Know the Most Common Types of Chargebacks?
The most common types of chargebacks are merchant error, criminal fraud and friendly fraud. Do you know how your involvement in each of these chargeback situations affects your bottom line?
There are a number of reasons why chargeback claims are filed. Our first option is a legitimate chargeback: the merchant did not fulfill their promises or were unable to satisfy the customer’s needs.
These chargebacks are filed because:
- The merchant did not provide the product or service as described.
- The customer received the goods or service in imperfect condition or under unsatisfactory terms.
- The customer never actually received the product or service.
- The customer was charged twice for the same purchase.
- The customer never formally authorised the charge to the merchant.
- The customer was unable to contact customer service for an exchange or return.
- The merchant and customer were unable to reach a mutual agreement regarding a purchase, exchange, or refund request.
- The customer was charged a different amount of funds from which was previously agreed upon.
- Unexpected or undisclosed currency conversion rates were applied.
- The return or exchange policy was unclear.
- The cancellation policy for any ongoing or recurring billing procedures was undisclosed or unclear.
These legitimate chargebacks are often filed due to merchant error and are therefore difficult to dispute.
If we look at the history of chargebacks, we see transaction disputes were created for this exact reason. Before the customer was able to dispute charges directly to their bank when they had been wronged by a merchant, they were easily taken advantage of. Chargebacks are what stop individuals and companies from scamming consumers out of their credit card information and giving them nothing in return.
It is probably frustrating to learn one of the most common types of chargebacks is simply a result of negligence. Fortunately, these causes of chargebacks aren’t as common as other sources of profit loss. And as an added bonus, most of these chargebacks are preventable!
The second most common type of chargebacks is due to credit card fraud. When cardholders find illegitimate charges on their bank or credit statements that they know they did not authorise, they are made aware that their card has been compromised. If the customer is sure that they did not make the specified purchase, they then have the opportunity to contact their issuing bank and inquire about the charges.
At this point a few different things could happen between the bank and the cardholder. If the cardholder knows their card has been compromised, the bank will often cancel the card and issue the customer a new one. If the customer chooses this course of action, they are highly likely to be a victim of credit or debit card fraud.
If the customer chooses to proceed with the chargeback but opts out of cancelling their payment card, it is possible that someone they know may have used the card without authorisation to make the questionable purchase. This would mean that while the purchase has resulted in a billing error, the card itself has not necessarily been compromised.
In addition, there are instances where customers have their physical card on hand, knowing it has not been lost or stolen. This does not, however, mean that the card itself has not been compromised. Fraudsters often test card numbers at random until they find success and the transaction is approved. Knowing the number was successful, fraudsters will then come back to this card number repeatedly until the account is closed or the card itself is cancelled.
Bank account and routing numbers are also prime real estate for fraudulent transactions. By routing money to other accounts, fraudsters are then able to make purchases or withdrawals from a third party account. Account numbers have the ability to give criminals access to bank accounts that do not belong to them, which presents a major threat to the cardholder, whether they physically have their card or not.
Any time a purchase is made on a payment card that was not made by the cardholder himself, it is known as criminal fraud. Occasionally, cardholders will recognise the descriptor on their bank statement, contact the merchant involved in the transaction and request a refund for the fraudulent charges. While this will often result in a refund for the cardholder, the account itself has still been compromised and action should be taken. While there are occasions when they can be avoided, criminal fraud chargebacks are legitimate and valid. Cardholders are protected from criminal fraud by having the ability to file chargebacks on transactions that they did not approve.
Chargebacks may have been created and developed to protect consumers from fraud and deception, but they no long serve solely their intended purpose. Cardholders have been able to manipulate the process unlawfully in what has become known as friendly fraud. By abusing the right to file a chargeback, cardholders end up with their money and the product, while the merchants are left high and dry, wondering how this could have happened.
Friendly fraud, also known as chargeback fraud, is the act of filing a chargeback on a purchase that was made, authorised, and received.
There are two ways in which friendly fraud is committed; accidentally and intentionally. No really, cardholders commit accidental chargeback fraud without even realising it.
Any time a customer places or approves an order and receives the product or service but disputes the charges with his or her issuing bank, it is considered friendly fraud. Customers accidentally commit friendly fraud when they dispute a charge that they did not realise was authorised and valid. Sometimes they are unable to recognise or remember a descriptor on their bank or credit card statement. Other times, they forget they placed an order at all, or the charge appears on their statement a significant amount of time after the order was placed. Yet other times, customers sign up for subscription services or recurring payments but change their minds when the next recurring charge is processed.
It is also possible that the cardholder has authorised a friend or family member to place an order using his or her card, but has simply forgotten or does not recognise the descriptor used. All of these instances result in a chargeback being filed when the purchase was authorised by the cardholder.
Friendly fraud is also committed purposefully by cardholders who are able to keep the product and receive a refund. When a consumer places and order for a product or service with their credit card and receives his or her purchase but contacts the card issuing bank to dispute the charge, they are committing friendly fraud. If the chargeback is awarded in the cardholder’s favour, the merchant loses both the product and the payment for the product, and the customer gets away with both. These are the type of chargebacks that are the biggest threat to merchants and must be disputed.
While some of these customers are experiencing buyer’s remorse, regretting the purchase but not willing to return the product through the mail, others have set out to get a product for free. Cardholders who are looking for free products at the expense of merchants can be stopped if the merchant involved is able to dispute the chargeback and prove the charge was authorised, the purchase was delivered, and the product was as described. Friendly fraud chargebacks are not only the most important chargebacks to fight back against, but they are also important to prevent.
Preventing and Disputing Chargebacks
Once merchants are able to identify the three most common types of chargebacks, they are able to reduce the risk of these disputes in the future. Implementing an effective chargeback prevention campaign can help reduce profit loss and ensure a business’s longevity.
However, prevention tactics must be both aggressive and strategic. For example, Sony’s chargeback prevention policy is heavy on aggression but lacks a logical element.
Likewise, disputing chargebacks must be a methodical task business perform on an ongoing basis. Each time a merchant fights an illegitimate chargeback, the banks are reminded that friendly fraud is unfairly crippling merchants.
If you’d like help preventing and disputing the most common types of chargebacks, let us know. We’d be glad to help!