How Have Chargebacks Changed?

Over the past few years, merchants and issuers have embraced digital transformation at a tremendous pace. As consumers’ preference for engaging with companies online has grown, businesses have been rethinking how to best interact with them in new and impactful ways—and increasingly through digital channels.

This transformation and overall rise in ecommerce transactions have also changed the chargeback landscape. The reasons consumers initiate disputes and chargebacks are no longer limited mostly to fraud. Today, consumers have higher expectations than ever around companies and brands delivering a positive shopping experience, from browsing to purchasing to post-transaction—sparking a significant shift in chargeback trends.

So what’s changed over the past few years? A recent report by Ethoca and PYMNTS.com looks at how digital-first shopping habits are driving a surge with disputes and chargebacks since 2019. 

Here are two key findings from report, along with what merchants and issuers can do to prevent this chargeback surge from hurting their bottom line:

1. Changing consumer behavior 

Online shopping has seen tremendous growth, with 54% of consumers surveyed saying they shop more online now than they did two years ago. This growth is likely at least part of the reason that chargebacks are changing.

While friendly fraud and genuine fraud remained among the common reasons for disputes, service errors such as packages arriving late or damaged or being delivered to the wrong address were by far the top reason. In fact, 71% of consumers surveyed who disputed charges in the 12 months prior had done so because of a service error. 

The data suggests that consumers are increasingly using the dispute and chargeback process to deal with service errors instead of contacting merchants directly.

Transaction confusion—when the customer does not recognise an authorised purchase on their card statement and disputes it—was the second most common reason for disputes, with about 39% of consumers saying they had disputed a charge for that reason.

2. Merchants experiencing uptick in chargebacks

The volume of chargebacks has also risen considerably along with the surge in digital transactions, the report found. Overall, ecommerce merchants reported an average increase of 7.5% more chargebacks compared to their 2019 volume. However, some merchants saw far more dramatic increases, with research showing that 17% saw their chargeback volume increase more than 25% and about 9% seeing their volume increasing more than 50% over that same period.

Coinciding with that, consumers reported initiating more transaction disputes, with 24% saying they had disputed a charge within the past 12 months and 12% saying they disputed charges at least once a month.

Navigating the Changing Chargeback Landscape

Because chargebacks are so costly—and the chargeback process so involved—it’s imperative that merchants and issuers take steps to address these changing consumer behaviors and reduce the growing chargeback surge from sapping their bottom line.

Of the merchants surveyed, 77% have already invested in or plan to invest in chargeback prevention strategies.

The most effective tools are those allowing merchants and issuers to work together to prevent disputes from turning into chargebacks—avoiding the costly chargeback process altogether while enhancing their operations to better support today’s digital customer experience. Ethoca Alerts, for example, provides merchants with an alert from issuers in real-time whenever a customer disputes a charge. This allows the merchant potentially reverse the dispute before it turns into a chargeback. In the case of actual fraud, merchants can stop the order fulfillment or delivery and take other steps to reduce losses.

Reducing transaction confusion is another critical way to prevent chargebacks. Ethoca Consumer Clarity puts a recognisable merchant name and logo along with rich transaction details right into the digital banking applications that consumers use to check their transaction history, as well as providing it to issuers’ call center teams. This helps jog customers’ memory and can greatly reduce the odds of confusion. For issuers, a digital-first approach is the best method of prevention as it enables them to address more disputes earlier in the process, well before they become a formal chargeback. 

Most importantly, merchants and issuers can’t postpone taking steps to address the evolving disputes and chargebacks landscape. Leveraging tools that safeguard against chargebacks while creating a better customer experience will ultimately strengthen merchants’ and issuers’ overall fraud and digital experience strategies.  

Want to learn more about how the disputes and chargebacks landscape is shifting? Download the Ethoca and PYMNTS.com report below.