Chargebacks Explained and How You Can Avoid and Reduce Friendly Fraud

If you own a small business, perhaps an online or brick and mortar store, you may have heard about chargebacks and so-called “friendly fraud.” While owning a small business is a dream for many, it requires a lot of work. Besides dealing with competitors, you’ll also have to navigate labyrinthian policies, regulations, laws, and the like. One particular problem for businesses is chargebacks, and specifically those that are the result of “friendly fraud.” In this article, we’ll cover what chargebacks are and also discuss how you can avoid them.

Chargebacks and Friendly Fraud Defined

So, what is a chargeback anyway? When a credit cardholder goes to their issuing bank and asks that a charge be reversed for whatever reason, they’re trying to secure a chargeback. If the bank should approve the chargeback, they’ll reverse the charge, thus taking money from the merchant. Merchants will also have to pay a nonrefundable chargeback fee. Typically, this fee will range between $20 and $100 per chargeback.

In some instances, chargebacks occur because the customer’s credit card was stolen, or perhaps their product was stolen or damaged. Let’s say the Post Office drops off a package at the customer’s door. Then, shortly after, someone steals that package. From the customer’s perspective, they never received the product, and thus shouldn’t have to pay for it.

Likewise, someone may have used a skimmer to steal a person’s credit card number. Or perhaps a pickpocket stole the physical credit card. Either way, if the card is stolen and used, the cardholder will rightfully be upset that they’re facing unauthorized charges. Often, these cardholders can and will secure a chargeback through their bank or credit card company.

Legitimate reasons a bank may issue a chargeback:

• The customer was accidentally double charged
• Recurring payments were not canceled as requested
• Product description was inaccurate
• Customer never received the product or service

So how about friendly fraud?

Whereas with true fraud someone has stolen the cardholder’s information, with friendly fraud the cardholder actually makes the purchase in dispute. They either do not recognize the purchase or they’re knowingly trying to pass it off as fraud. It’s known as friendly fraud from the former instance, where the cardholder is making an honest mistake. When the cardholder is knowingly trying to steal a product through their bank’s chargeback policy, this form of friendly fraud is also referred to as chargeback fraud.

Whether friendly or unfriendly, it’s all the same to the merchant. They made a legitimate sale and yet suffer an unwarranted chargeback. The merchant loses their product and its revenue, and on top of all that, is hit with a chargeback fee. This is friendly fraud.

Some experts estimate that as much as 85 percent of chargebacks are, in fact, the result of friendly fraud or chargeback fraud. Even worse, if your business suffers a high number of these chargebacks, you may be designated as high risk or placed in a monitoring program. You’ll then face higher fees and penalties, and ultimately could be banned from accepting credit card payments. For many businesses, this could amount to a de facto death sentence.

It’s possible to fight chargebacks and friendly fraud. Unfortunately, many banks side with customers rather than merchants. That’s why it’s smart to take steps to reduce chargebacks.

Reducing Chargebacks and Protecting Your Business

Fortunately, there are many steps you can take to reduce the risk and impact of chargebacks. First, your company should strive to establish a customer-first culture that encourages customer engagement.

Sometimes people go through their bank to secure a chargeback because the merchant’s refund policy is simply too convoluted or cumbersome. By simplifying your refund policy and making it free or low cost for customers, you may be able to reduce chargebacks.

With a customer-first culture in place, you should also craft clear, precise, and detailed product descriptions with photographs of the actual product. By setting the appropriate expectations from the get-go, you can reduce the risk of a dissatisfied customer. If you promise the moon and fail to deliver, customers may rightfully be upset and seek out chargebacks.

Speaking of expectations, you should also set appropriate expectations for the shipping time and shipping process. If customers expect your goods to show up in two days, but it takes two weeks, by the third or fourth day they may try to secure a chargeback, thinking that the product must have gotten lost.

Tracking numbers and requiring signatures are also good moves when it comes to shipping. The more closely your goods are tracked and handled throughout the shipping process, the better. Doing so should reduce the risk of your product getting lost. With signatures, you can more easily prove that the customer received the product.

Communication with customers is also vital for reducing chargebacks. Any online merchants should offer convenient ways for customers to get in touch. Make sure your contact information is clearly displayed online. This may include emails, phone numbers, and online chat programs. Be sure to include business hours if applicable, and a brief description of your resolution process.

Reversing and Successfully Disputing Chargebacks

Though friendly fraud may make up the bulk of chargebacks they face, merchants can dispute them and recover the revenue. Even though banks tend to side with their customers rather than merchants in disputes, there are some steps you can take to improve your chances.

First, you can fight unwarranted chargebacks through a process called representment. Essentially, you’ll re-present the transaction to the bank. From there, you’ll furnish evidence proving that the charge was legitimate, and that the customer received the products or services purchased.

The representment process involves a series of deadlines and if you miss the deadlines, you may be out of luck. This makes proactive, informed chargeback management for merchants all the more important.

Managing Representment and Chargebacks With the Right Tools

Managing the chargeback dispute process can be difficult. This is especially true for small businesses. While a big company can hire a team specifically to handle chargebacks, smaller companies often lack said resources.

However, with the right chargeback management tools, you’ll also have an easier time gathering data. Companies big and small should look at chargeback data to see if there are any observable trends. For example, you might find a certain product generates a lot of chargebacks. Checking out the product page, you may realize the product description is misleading. Now you know what to change.

By being proactive, you may be able to reduce the risk of chargebacks. This will save you time and money and may lead to more satisfied customers.

Conclusion

Fraud is a major challenge for merchants, especially since it leads to chargebacks that drain revenue and resources from their bottom line. However, merchants can fight the vast majority of chargebacks they face. Chargebacks from friendly fraud can be reversed when the merchant can prove the cardholder actually made the purchase.

Merchants can encourage cardholders to come to them, and not the banks, with any issues. Merchants should also document each transaction so they can provide evidence to resolve disputes. And when chargebacks hit, that evidence can be submitted for representment to recover the revenue.

By using a chargeback management platform, businesses can simplify how they manage and fight chargebacks. It can also help track chargebacks, documentation, evidence, communications, deadlines, and other important aspects of the chargeback management process. Using a chargeback management platform to resolve and analyze chargebacks is proven to protect the merchant’s bottom line.

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