Two Reasons Chargebacks are on the Rise

2018 was an eventful year from a chargeback perspective. This was, in part, due to the first phase of Visa’s long-trailed update to its card scheme rules coming into effect. Called Visa Claims Resolution (VCR), it ushered in a number of changes to the way consumers, issuers and merchants deal with chargeback or “dispute” claims.

The changes were designed to make it easier for merchants to process and refute dispute claims, and they couldn’t have come at a better time. According to a recent report by Experian, 55% of global businesses say they’ve seen a significant jump in the number of chargeback claims over the last 12 months.

But why is this the case? What’s changed and what can merchants do to minimise the risk?

Reason 1: The Rise of Banking Apps

There are a few key reasons why chargebacks are on the up, but a particularly important one is the growth in popularity of mobile banking. These sophisticated apps allow people to check their finances easily on the move, helping to increase individuals’ scrutiny of their own spending.

This is good for consumers, because having regular oversight of their bank accounts means that they can quickly spot transactions they don’t remember authorising. For merchants though, this benefit has resulted in a significant increase in the number of disputes coming their way, as consumers can more easily make chargeback claims for purchases they don’t recognise.

Reason 2: Fraud on the Rise

There are many reasons that a consumer might not recognise a transaction. It may be a case of benign friendly fraud caused by transaction confusion or household miscommunication. However, for the most part the rise in chargebacks is the result of an increase in genuine, good old-fashioned fraud. 

Payment fraud can come in many forms, but two are particularly prominent at the moment. In the first – called an account takeover (ATO) – criminals hack into a genuine consumer’s retail account to make purchases and arrange for the product to be delivered to an address they control. In the second, they steal a consumer’s card details and use them to set up a new account from scratch.

Both kinds are on the rise around the world, thanks to the growth in ecommerce – where all transactions are ‘card not present’ (CNP) and identity verification is often difficult. 

This ongoing fraud surge is feeding the boom in chargeback claims. In the US alone, 80% of businesses said they have experienced a significant increase in disputes due to online fraud as reported by Experian. 

With this in mind, it’s clear that if they want to stop chargeback costs from eroding their bottom line, merchants need to take steps to prevent fraud.

Tackling the problem

So, what can merchants do to prevent online fraud? Well, the first thing is to learn how to recognise suspicious activity before a transaction occurs. This way, merchants can take steps to require additional authentication before the purchase is made, protecting themselves, and consumers, from fraud.

To successfully recognise suspicious activity though, merchants need to know their customer (i.e. their normal spending habits, how much they spend, what they buy, their standard delivery address, etc.). Knowing these things can go a long way towards successfully identifying a transaction as suspicious. Unfortunately, many merchants lack the resources needed to monitor customer activity beyond the scope of their own business. This is why collaborative solutions are so effective. 

Take Ethoca Alerts for example. Not only can it help merchants fight immediate fraud and chargebacks through near-real time, cardholder confirmed notifications, it can also be used to pull and cross-check data to see if there are any other related fraudulent transactions. What’s more, alerts data can be used to enhance negative lists and the efficacy of other fraud engines – thereby stopping future fraud.  

In short, this solution allows you to not only reduce the damage caused by fraud today, it saves you from more fraud in the future AND all the related chargeback costs and consequences. Not too shabby, right?

Getting expert help

Spotting fraudulent transactions and building evidence for chargeback disputes can seem a daunting challenge – especially since fraudsters are constantly adapting their activity to stay ahead of the game and friendly fraud continues to increase. 

If you need advice on choosing the right system for your business, take a moment to talk to a fraud prevention expert. They’re perfectly placed to provide you with the information you need to make the best investment decisions.