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When most people think of fraud, identity theft comes to mind first. While this is a frightening scenario to be in, in truth, it's not what online merchants should fear most. Chargebacks, intended as a way for cardholders to recover losses from fraudulent transactions, are also being leveraged against retailers, both intentionally and otherwise.
This phenomenon, called chargeback fraud or friendly fraud, has grown alongside the increase in online shopping and costs merchants billions every year. How do businesses recognize and stop chargeback fraud?
A chargeback is a return of money to a cardholder to reimburse them on a disputed charge, initiated either by the merchant or the bank that issued the card. In the former case, typically for refunds on returned items, it's quite simple—the merchant simply makes a transaction and pays the cardholder back. However, when initiated by the issuing bank by the cardholder's request due to an item not arriving or an unauthorized transaction occurring, the process takes longer as the two banks must work to settle the chargeback. This also usually results in a chargeback fee against the merchant.
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Friendly fraud, where no actual identity theft has taken place, is somewhat of a misnomer—some cardholders use chargebacks unscrupulously to get free goods by forcing a refund on a purchase they claim did not arrive. However, just as often, the incident comes down to an error. A family member of the cardholder may have used the card to make a purchase for themselves, leading to an unfamiliar charge showing up; alternatively, the cardholder may have made a purchase but later forgot or failed to recognize that the resulting charge was theirs. Either way, though, this can put the merchant in a bad spot as the bank generally sides with the cardholder, resulting in lost sales and chargeback fees.
Many merchants faced with chargebacks opt not to dispute them, either because they feel they can't win or that pursuing this option would be even more costly. However, many chargebacks due to honest mistakes can be avoided with best practices like tracking deliveries, using recognizable billing descriptors and keeping extensive documentation. A strong e-commerce platform and payment processor helps, too, with built-in seller protection; some, like Ethoca or Signifyd, also aid merchants by better facilitating communication with issuers and creating a network of info on customers that commit fraud.
Though the issue can seem stacked against online merchants, and efforts to better handle chargeback fraud are ongoing, understanding how chargebacks work can go a long way in protecting you from them.
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