If you are a merchant, you may have noticed lately the number of credit card chargebacks has increased. At some point, most businesses will experience a credit card chargeback or a dispute. Some of these disputes are legitimate, such as a stolen credit card or a result of a defective product, but more frequently, credit card companies and banks are detecting fraudulent chargebacks.
According to this article, chargebacks and on the rise, and these types of chargebacks are known as friendly fraud. Friendly fraud is when a customer purchases a product or service from a business with the hidden intention of disputing the charge afterward. The dispute is not a legitimate dispute, meaning the product or service would’ve been delivered as expected, but the customer is looking to get it for free so they dispute the charge after shopping. And according to the article, friendly fraud is up 20-30% from last year.
In one example from the article, a restaurant owner was interviewed and said that fraudulent chargebacks have increased 30% for his business and that it’s costing thousands of dollars per month. Customers will order directly from the restaurant or use a third-party delivery service like Uber Eats, then dispute the charge after their meal. When a merchant does choose to fight back on a dispute, they typically only win 40% of the time. So if you’re a merchant, what do you do?
The main thing to do to win against fraudulent chargebacks is to eliminate the easy chargebacks first. Make sure that the reason for the chargeback isn’t simply a mistake or misunderstanding. Oftentimes customers will see a charge from the merchant on their statement, but not recognize the name because they operate under a DBA, but their billing statement is under the full LLC name.
Also, be very cognizant of customer inquiries and complaints. If a customer sends in a complaint or states they never received a product or it was the wrong product, address it as soon as possible. You don’t necessarily have to refund it or bend over backward for a request, but at least take the time to address it and reflect on it. Many chargebacks come from customers who aren’t feeling heard and look to “punish” the company that made them feel this way by disputing the transaction.
Additionally, make sure that the description of your product or service doesn’t leave anything up to the imagination. Product descriptions should state exactly what they’re getting; don’t leave anything to chance. According to the Federal Trade Commission (FTC), merchants are responsible for the cognitive defects of a customer. This means that if your customer has a cognitive defect and cannot understand what they’re buying, they’ll win the chargeback and it’ll be your fault for not describing it properly. Make sure that your terms and conditions and product descriptions are very clear.
After implementing these practices to eliminate the low-hanging fruit, it’s possible that you’ll still experience some chargebacks. When that’s the case, make sure to have good documentation. Organize the receipts, shipping, and any other proof you have that you’ve done business with this person. Also, look to contact the customer to see if they are willing to discuss the issues with you. Tell them you want to hear their side of the story, and then present the evidence on your side. Sometimes a customer isn’t aware that when they do a chargeback it comes out of the merchant’s pocket. Many people think when a charge is disputed that the bank eats the cost and everyone moves on, but unfortunately, that’s not the case.
If you’re a merchant, be aware of the increase in fraudulent chargebacks, especially over the next year. More consumers are under financial pressure with inflation and they may be looking to recover some of that any way they can, and your business might be an easy target for them to get some money back in their pockets.
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