COVID-19 and Chargebacks

The following is a guest post by Monica Eaton-Cardone, cofounder and COO of Chargebacks911®.

Millions of consumers have been trapped at home for months due to COVID-19. It’s no surprise, then, that digital shopping channels have seen a surge of activity since the beginning of the outbreak.

E-commerce sales were up 55% year-over-year in July according to Adobe Analytics. That’s actually down from the previous two months, where we saw 78% and 76% surges in YoY activity, respectively.

This is great news for businesses operating in the digital marketplace. Of course, new opportunities mean new challenges. A sudden surge in chargeback issuances, for instance, threatens to take the wind out of our collective sails pretty quickly.

Chargebacks are a kind of forced payment reversal initiated by a cardholder, or by the cardholder’s issuing bank. There are dozens of different reason codes explaining why a customer disputed a charge. However, we can trace all chargebacks to one of three fundamental sources: merchant error, criminal fraud, or friendly fraud.

Friendly fraud occurs when a cardholder disputes a charge without a valid reason to do so. And, while these disputes are nothing new, we’ve observed a spike in this activity since the outbreak of COVID-19. Friendly fraud chargeback issuances were up 25% through the end of March, and the trend doesn’t appear to be dissipating.

A $100 Billion Liability

Friendly fraud was already projected to cost businesses about $50 billion in 2020 before the outbreak began. It’s too early to say how current trends will ultimately impact that figure. However, it’s possible that friendly fraud might result in more than $100 billion in losses this year alone.

This all begs the question: where are these fraudulent chargebacks coming from?

In a way, we can define friendly fraud more effectively by what it isn’t, rather than what it is. With criminal fraud, a bad actor uses stolen information to complete a purchase. With merchant error, the seller failed to live up to the obligations outlined in their terms and conditions. In either case, the buyer would be justified in disputing the charge.

Any chargeback that isn’t caused by criminal activity or by a clear mistake on the part of a merchant, could be considered friendly fraud. Buyer’s remorse is a common cause, as is the customer misunderstanding the merchant’s policies. There are also situations in which a friend or relative made a purchase without the cardholder’s permission (sometimes described as “family fraud”). There are even situations in which buyers knowingly abuse the chargeback process by making a purchase with the intent to dispute it later (“cyber shoplifting”).

In any case, the result remains the same. Friendly fraud means merchants lose revenue and merchandise and are also responsible for paying punitive fees. In the long term, this can lead to higher overhead for businesses, as well as higher prices and fewer options for consumers.

Is Anything Being Done?

Part of the problem is a general atmosphere of inconsistency in the marketplace. New technologies and innovations in sales channels are positive developments, but they need to be matched with industry rule changes. We’ve seen some positive developments; Visa and Mastercard have both implemented short-term changes and clarifications in response to the COVID-19 pandemic. As it stands, though, chargeback practices are hopelessly out of touch with the realities of the market.

Merchants can cut out most criminal fraud attacks by using fraud prevention tools like CVV Verification, address verification, and fraud scoring as part of a larger, multilayer strategy. They can also prevent merchant error chargebacks by addressing common triggers, including:

Unrecognizable billing descriptors
Inaccessible live customer service
Slow response to questions and inquiries
Confusing policies and terms
Delays in processing transactions

Once a merchant has largely eliminated the prospect of chargebacks caused by errors or criminal fraud, any remaining chargebacks should mostly be friendly fraud. Unfortunately, there’s no way to reliably prevent friendly fraud, as it appears to be a legitimate sale until the point at which a buyer disputes it. There are some practices, though, which can help minimize risk:

Notifying buyers before processing recurring payments
Maintaining well-organized transaction records
Providing tracking information and delivery confirmation
Replying to any questions, comments, or refund requests in a timely manner

Fighting Back Against Chargeback Abuse

Whenever friendly fraud does occur, merchants can engage in a process called representment. The term refers to the fact that the merchant literally “re-presents” the transaction to the bank. Of course, the merchant also needs to provide a pile of compelling evidence to refute the buyer’s claim and explain why the original transaction was valid. This evidence can include anything from printouts of email conversations between the merchant and buyer to delivery confirmation or proof of in-store pickup.

Merchants can’t simply fight every chargeback that comes their way, though. No defense is perfect, and even with the best tools and procedures in place, some small portion of chargebacks resulting from errors or criminal activity will still slip through from time to time. As a result, merchants may need to engage in manual review for each chargeback to determine which cases they can fight.

Roughly 4 in 10 consumers who file a friendly fraud chargeback will do it again within 60 days. And, as COVID-19 continues to reverberate in the market, the existing trend toward increased chargebacks will only deepen.

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Monica Eaton-Cardone is an international entrepreneur, speaker, and author. She possesses more than two decades of experience in the eCommerce space as both a merchant and service provider, and is one of the world’s leading experts on payments and consumer disputes. Monica is the Co-Founder and COO of Chargebacks911®, a global risk mitigation firm helping online merchants optimize their profitability through chargeback management. Chargebacks911 has more than 350 employees globally, with offices in North America and Europe.