The word chargeback isn’t included the general population’s collective vocabulary. Fraud, on the other hand, is most certainly recognized and understood on some level by consumers and merchants alike. Data breaches experienced by global retailers have become a regular in the news cycle. But this isn’t the case with chargebacks. It’s hard to believe that this incantation of fraud, which is expected to balloon to $31 billion by 2020, continues to fly under the radar.
So, what exactly is a chargeback? At its core, a chargeback is a transaction reversal. When a consumer uses a credit card or signs for a debit purchase, the card network almost always guarantees zero-fraud liability. Chargebacks are a form of consumer protection from fraudulent activity. Whether the fraud is committed by the merchant or individuals who unlawfully obtain and use credit card information (i.e. identity theft), the cardholder is completely protected.
Two Outcomes, Three Implications
There are many parties involved in the process, which can last many months. The conclusion of the chargeback process results in one of two outcomes: win or loss. These represent one of three situations (outside of product or service issues): the cardholder was a victim of identity fraud, the merchant has product or service issues, or the cardholder committed friendly fraud or chargeback fraud.
When a cardholder commits friendly fraud, there is no underlying malicious intent. He or she did not recognize the transaction on the statement, so a chargeback was filed. However, instead of a criminal unlawfully using the credit card to make a purchase, the purchase could have been made by the cardholder and innocently forgotten. Perhaps a family member made the purchase which the cardholder didn’t recognize or the chargeback was made mistakenly when the merchant would have accepted the return.
Unlike friendly fraud, chargeback fraud is the intentional misuse of chargeback rights by a cardholder in order to obtain a refund on a legitimate transaction. The cardholder ultimately is trying to retain the product or service rendered as well as the cost initially paid to the merchant. For many cardholders, filing a chargeback is as simple as logging into their online banking portal and clicking a few buttons to dispute a transaction.
Friendly fraud and chargeback fraud aren’t as well known as identity fraud, but no less damaging to merchants. Especially considering that through comprehensive responses, merchants are able to recover the revenue lost to the two fraud types.
What Chargebacks Mean for PrestaShop Merchants
Chargebacks carry many more implications than exposing shady merchants and softening losses from card-skimming criminals. From the merchant perspective, chargebacks function as an insightful lagging indicator of business operations. Each chargeback is categorized under a unique reason code.
The four major card networks each have their own sets of reason codes which they use to classify chargebacks. Across each card network, the hundreds of reason codes can be grouped into four main buckets: fraud or no authorization, cancel recurring billing, product or services, and liability shift.
Merchants see a mix of reason codes unique to their business and industry. However, the industry-wide breakdown gives a sense of the average dispersal of reason code types. If a merchant sees a disproportionate amount of any reason code bucket, there are clear implications that must be addressed.
- Fraud or No Authorization Reason Codes
- High Volume: A disproportionately large amount could indicate poor front-end fraud filtering.
- Zero Volume: No fraud reason codes at all could indicate front-end fraud filtering that’s too strict; potentially blocking legitimate transactions.
- Cancel Recurring Billing Reason Codes
- High Volume: Disproportionately large amounts of cancel recurring billing reason codes is a good indicator that your customer communication regarding payments and billing needs attention. Is it clear when users sign up that billing will occur monthly? Are you emailing users to remind them of invoice dates?
- Product or Services Reason Codes
- High Volume: Product and service reason codes have two main subsets: shipping and product misrepresentation. With an influx of shipping-related reason codes, merchants should look to evaluate distribution partners and consumer communication regarding tracking numbers, shipping dates, and any unforeseen delays. If a disproportionate amount of reason codes indicate the product was ‘not as described’, merchants should review product descriptions and specifications provided on the website.
- Liability Shift (Physical PoS Only) Reason Codes
- As you know, the liability shift holds merchants, no longer the issuer, responsible for counterfeit transactions where the card is chip-enabled and the terminal isn’t. Brick and mortar merchants without operating, approved, and functioning EMV are seeing influxes of liability shift reason codes. The SMB market saw chargeback rates for bankcard transactions increase in Q4 2015 nearly 31% compared to Q3.
Reason codes are a hidden treasure trove for merchants looking to improve efficiency, performance, and fraud protection.
Managing the Response Process
Preventing chargebacks is possible, albeit more hands-on than front-end identity fraud solutions. The true opportunity lies in responding to chargebacks that occur. Through providing compelling evidence, merchants can win chargebacks that are really friendly fraud or chargeback fraud, positively and directly impacting the bottom line.
Learn more about efficient and more effective dispute management with a free trial of the Chargeback PrestaShop module.
Scott Stone is the CMO at Chargeback, the industry-leading dispute management platform and a PrestaShop Technology Partner. With over a decade in Sales and Marketing, Scott's focus is helping merchants of all sizes realize profitability and success.
- What exactly is a #chargeback?
- We all know about #fraud, but what about #chargebacks?
- There’s a big opportunity in responding to chargebacks.
- Chargebacks function as a valuable lagging indicator for merchants.
- If you accept payment cards, you get chargebacks.
- Chargebacks are meant to protect consumers from fraudulent activity. But, they can end up costing merchants revenue.
- Friendly fraud and chargeback fraud aren’t as well known as identity fraud, but no less damaging to merchants.
- Understanding chargebacks and associated reason codes improves your efficiency, performance, and fraud protection.
The conclusion of the chargeback process results in one of two outcomes: win or loss.