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The Future Of Chargebacks In Digital Payments

As part of doing business online, merchants have found themselves facing an ever-growing adversary…the chargeback. Launched more than forty years ago as a consumer-protection mechanism when credit cards were still in their infancy, these “forced payment reversals” have become a thorn on merchants’ sides. Not to mention a looming threat to their survival.

The chargeback process is when a customer disputes a transaction, usually on e-Commerce purchases. Typically, the customer approaches their card issuer or bank to refund their money. They don’t approach the merchant whom they purchased the item or service from. 

Some of the common reasons why consumers pursue a chargeback are as follows:

  • They never received the product they ordered.
  • They received the product in a damaged state.
  • Their credit card was used without their authorization.
  • They did not recognize the transaction

The Implications Of Chargebacks On Merchants

Chargebacks are most definitely an unpleasant side-effect of doing business online. But a more careful examination proves that it is more than just an annoyance and inconvenience. Chargebacks have the potential to completely derail your finances and ultimately, your business. 

Moreover, although this was originally intended to protect consumers, more consumers are taking advantage of and abusing this process. This is called “friendly fraud”. Friendly fraud, also known as chargeback fraud, is when consumers abuse the chargeback procedure. They abuse it by making a claim for fraud on legitimate purchases, thereby stealing directly from merchants. 

Now let’s look at both the short and long-term repercussions of chargebacks for merchants:

  • For every chargeback filed by the consumer, the merchant is responsible for paying a fee that ranges anywhere between $20 to $100 for every transaction. 
  • If a customer files for a chargeback and keeps the product, not only does that merchant lose the revenue, but also any future revenue that product could have produced. 
  • If the merchant’s chargeback rate goes beyond a predetermined level, outrageous fines in the ballpark of $10,000 can be issued against the merchant. 
  • If the merchant’s chargeback rates continue to surpass the accepted threshold, the acquiring bank will terminate the merchant’s account. Merchants will no longer be able to accept credit payments, which means loss of income. 

Chargebacks are certainly something that cannot be overlooked. 

Raymond Pucci, Director of Merchant Services at Mercator Advisory Group, and the author of the report, “Merchant Chargebacks Are on the Rise Due to Friendly Fraud”, had this to say:

“Merchants are incurring a major pain point dealing with consumer-disputed sales transactions that can lead to chargebacks. This can mean merchants lose not only the sales revenue but also the merchandise and related overhead costs as well,” 

According to this aforementioned report, chargebacks due to friendly fraud are expected to hit $50 billion in 2020. 

On the flipside, another threat following closely behind chargebacks are transactions wrongly declined for suspected fraud. These are known as “false positives”. This is an extreme solution to rising chargeback rates. 

Javelin Strategy and Research has found that almost 15% of cardholders have experienced a false decline, which represents a loss of $118 billion. This diminishes customer loyalty to the card issuer and the merchant.

It’s Time To Take Action

Merchants have the power to radically decrease friendly fraud. To follow a proactive approach, consider offering timely and attentive customer service. Ensure that you always provide products of the highest quality. Monitor all transaction details. If you don’t give customers a reason to complain and issue a chargeback, the chances are high that they won’t. 

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