Credit and debit cards are now a ubiquitous part of our everyday lives. However, in their early 1970s beginnings, consumer fear drove low customer acceptance rates. People were worried their cards could be lost or stolen and used for unauthorised transactions with the owner left to foot the bill.

In 1974, The US Fair Credit Billing Act tried to address these issues by creating what is now called a “chargeback” – a form of protection designed to ensure the cardholder’s money was safe, no matter what.

Chargebacks can appear quite similar to traditional refunds. However, there’s one key difference: instead of reaching out to the business for a refund, the consumer has the option to ask the bank to take the funds from the business’s accounts. The latter usually happens after the bank investigates the consumer’s claim.

Although chargebacks have been around for a long time, many consumers don’t realise they have chargeback protection. Similarly, consumers that know of this protection often misunderstand how chargebacks work.

Consumers that are victims of impersonation fraud have every right to raise a chargeback claim for fraudulent purchases. The banks encourage victims to contact them directly, recover stolen funds and secure their accounts against further fraudulent transactions.

In almost all other cases, consumers are encouraged to communicate directly with the merchant. The goal is to have issues resolved without the bank’s involvement, which is usually a more straightforward process for both the merchant and the client, as refunds are quicker than chargebacks.

To better understand how chargebacks work, let’s take a look at the basic lifecycle of one:

1. The cardholder files a chargeback – a dissatisfied consumer reaches out to the issuer bank and asks for a refund.
2. The issuer bank begins the review process – a reason code is assigned (e.g. services or goods not as described; goods not delivered).
3. The issuer bank investigates the claim – the merit of the complaint is investigated alongside supporting evidence. If valid, the issuing bank will send a notification of the chargeback to the merchant’s bank. Alternatively, the chargeback is voided.
4. The merchant reviews the chargeback – they can present additional evidence, disputing the complaint. This process is called representment. Of course, if the chargeback is justified, the merchant must accept the losses.
5. Final issuer review – a final review of all evidence and deciding the outcome of the claim. If the merchant’s evidence does not refute the cardholder’s claim, the chargeback will stand.

Not all claims are that simple. A crucial part of the chargeback lifecycle is the reason for its existence. This is where merchants face many risks associated with “friendly fraud” – a growing trend in recent years where customers make a purchase online for a product or service with their credit card and then contact their card issuer to dispute the charge.

According to a recent study, over 80% of cardholders filed a chargeback simply because they didn’t have time to request a refund from the merchant. If we are to include ill-intended fraudulent chargebacks in the mix, the numbers point to a substantial problem.

Friendly fraud claims are often abusing the chargeback system, which, although designed as a consumer protection, has seen industry regulations not keeping up with technology changes and new payment options.

One way businesses can protect themselves against this trend is to use a fraud check system like TRU Fraud Check that uses Artificial Intelligence and authentication technology to stops fraud in its tracks.

Credit card fraud losses account for 45% of all losses to fraud in 2020, totalling around £574m. Although difficult to quantify, fraudulent chargebacks make up a significant proportion of that number, with experts noting that “Chargebacks and chargeback management is costing merchants an average of 8% of revenue”.

Merchants should focus efforts on implementing strategies that will protect revenue from fraudulent chargebacks in the long term, such as:
● Optimising payments processes to avoid internal errors that cause genuine chargebacks.
● Keeping accurate records of purchase information will help with challenging fraudulent claims.
● Preparing customer service teams to deal with chargeback specific customer enquiries, attempting resolution outside of the chargeback framework.
● Enhancing security through specialised systems like TrustPayment’s 3D Secure system will confirm eCommerce consumers’ identity using fingerprint authentication, voice or face recognition, and behavioural biometrics.

However, the critical element remains the merchant’s ability to distinguish between genuine chargebacks and friendly fraud. It is possible for merchants with only a few cases to manually review and compare against records to see if they are genuine or not.

For retailers with many transactions, this approach will not be feasible, so some external assistance from companies specialising in handling disputes may be necessary. Using unified payment platforms like TRU Acquiring will help you reduce chargebacks. It ensures real-time transaction monitoring and chargeback protection as per their partnership with the top service providers in this field, such as Chargebacks 911 Verifi and Ethoca.

Both genuine and fraudulent chargebacks can put significant strain on a business – investing time and resource in differentiating between the two and avoiding chargebacks altogether is a necessity in today’s modern payment world.

For more information on chargebacks and double-credits, click here to download the Emerging Payment Association May 2021 Customer Disputes Report.