The majority of merchants challenge first-party misuse – but are they winning?
A recent survey conducted by Chargebacks911, the global chargeback technology leader, revealed that on average, 45% of all chargebacks filed against merchants stem from misuse or outright abuse – a practice commonly referred to as “friendly fraud.” Major card networks like Visa and Mastercard say this number can be as high as 75% for some merchants. However, even with up to three-quarters of all chargebacks being reported as illegitimate, merchants only win 18% of cases when appealing chargebacks.
These recently-released findings come as eCommerce merchants process more card-not-present transactions than any other time of year. In fact, for online retailers, 2024’s holiday shopping season so far has been the busiest on record, with Adobe Analytics reporting US consumers spent a record $41.1bn between Thanksgiving and Cyber Monday, an 8.2% increase from 2023. With chargebacks occurring at a much higher rate with card-not-present purchases, merchants are bound to face soaring rates of friendly fraud. With friendly fraud spiking and merchants winning so few of their representment cases, many retailers are concerned this year’s “Golden Quarter” will cause significant damage to their reputations, merchant accounts and bottom line.
In the world of transaction disputes, a response rate measures how often a merchant challenges chargebacks by engaging in the representment process. Findings from the 2024 Chargeback Field Report, which surveyed more than 300 retailers ranging from small businesses to enterprise merchants, found that, on average, merchants who represented did so for 52% of their chargeback cases.
According to the report, presented in partnership with Edgar, Dunn & Company, while enterprise-level merchants are far more likely to challenge false claims, they also fight a smaller percentage of those cases. This might be because their focus is primarily on high-end claims, but it could also be because an in-house team has learned through experience which challenges are more likely to be successful.
“At best, chargebacks present an operational burden; at worst, they become an operational risk,” said Monica Eaton, CEO of Chargebacks911. “Acquirers and merchants must work together to make the chargeback handling process – including responses – as efficient as possible. Minimizing the costs and effort of chargeback management typically means focusing on two key factors. One is the automation of what is often still a manual process. The other is access to complete, accurate data prior to investigating liabilities.”
The net recovery rate, or a merchant’s rate of successful representment, is on average 20% of what is disputed.
“It is encouraging to see that merchants are rightly challenging first-party fraud, but this is just the tip of the iceberg. A company’s chargeback management strategy must be robust, well thought out, appropriate and executed from end to end,” said Eaton. “By looking beyond the initial challenge and the top line win rate, merchants have the opportunity to effectively up their average wins, while also serving as a benchmark against which they can make informed decisions and plan effective strategies. This will rely on being resourceful as a company and committing to the task at hand.”
While some merchants may win a portion of their chargeback representments, it’s not the silver lining many imagine. For example, if a retailer disputes an illegitimate chargeback and wins, the cardholder still has the right to file a second chargeback with their issuing bank on the same transaction, a process known as pre-arbitration. Furthermore, even if the deciding party rules in favour of the merchant, that merchant is still subject to irreversible consequences, including chargeback penalties and fees, loss of sale and product, and demerits to their merchant account with their acquiring bank, which can lead to higher processing fees or closure of their merchant account altogether.
There are several reasons that merchants might choose to not contest every illegitimate chargeback, for example the rules around it are complex and can be a burden to decipher. Additionally, the burden of proof lies solely on the merchant, so if a business does not have a process in place to gather, analyse and segment transaction information, there may not be enough evidence on file to fight against illegitimate disputes.
While regulatory bodies work out how to best address friendly fraud so both company and cardholder are equally protected, Eaton says the best defence for merchants is to gather as much transaction information and compelling evidence as possible, and respond to every chargeback they receive. Doing so will not only help overturn more fraudulent chargebacks, but will help build rapport with a merchant’s acquiring bank. In order to do this, companies should implement chargeback prevention measures that alert merchants to disputes before they escalate to chargebacks. Additionally, merchants should incorporate a chargeback management process that is capable of gathering all pertinent transaction data—such as IP and shipping addresses, delivery photos, and signatures confirming delivery – to use in the event of a chargeback.
For businesses lacking the time, resources, or expertise to navigate the complexities of manual dispute resolution and ever-changing regulatory and card network updates, third-party chargeback management companies offer valuable support to safeguard transactions and protect overall revenue.
To view the 2024 Chargeback Field Report in its entirety, visit www.chargebacks911.com/chargeback-field-report.
