Failure to stop criminal fraud makes it more difficult to deal with other sources of threat that can result in chargebacks.
Chargebacks, also known as credit card disputes or chargebacks, are likely something you are aware of if you have worked in the eCommerce industry for any time. These payment reversals at the bank level are not just minor annoyances. Each chargeback leads to diminished earnings and increased costs. They might eventually pose a long-term threat to the survival of your company.
Every given chargeback has a reason code intended to describe the situation. These reason codes, however, are not trustworthy predictors. The e-commerce chargeback management company, with their expertise, explains that regardless of the accompanying code, the truth is that we can link every chargeback to one of three basic causes:
Third-Party Fraud: Criminal behavior that includes all fraud attacks in which a bad actor poses as an authorized user to make fraudulent purchases is referred to as “third-party fraud.”
Merchant Error: The term “merchant error” refers to any error in policy or procedure on your side that could lead to a chargeback.
First-Party Fraud: In friendly fraud, a cardholder completes a transaction and subsequently asks for a chargeback without a good reason.
Before you can resolve chargebacks, you must be able to source disputes. This is due to the fact that every chargeback source necessitates a wholly unique but related solution.
Let’s imagine, for example, that you are having issues with cardholders committing friendly fraud. Treating these chargebacks as third-party criminal fraudsters in an attempt to solve the problem will just waste resources and cause conflict with no meaningful effect on disputes.
However, that would be far worse if you received chargebacks due to criminal fraud and mistakenly believed they were the consequence of friendly fraud. In that situation, you run the risk of re-victimizing a cardholder who has previously paid criminals money while the real fraudster gets away with it.
Look For Why Beyond Reason Codes
A reason code is included with each chargeback that a bank issues. These numbers are used to specify the grounds for the chargeback. So why are reason codes so inefficient at identifying the sources of chargebacks? The issue is friendly fraud.
A cardholder effectively makes a fraudulent claim when they engage in friendly fraud, intentionally or by mistake. However, the bank accepts this assertion at its value and issues a chargeback against you. The bank then assigns a reason code to the issue that may or may not accurately describe the current circumstances.
Let’s use a Visa cardholder as an illustration. Now, a member of the cardholder’s immediate family, such as a child or a spouse, is allowed access to the questioned card. When the family member purchases goods without the cardholder’s knowledge and the transaction appears on the cardholder’s statement, the cardholder assumes it was made without authorization and submits a chargeback request. The bank includes the Visa reason code 10.4 Other Fraud – Card-Absent Environment in its chargeback.
This is only one illustration of a restriction associated with the current reason code-based approach. But in a broader sense, it shows why you can’t rely on reason codes to identify problems. Chargebacks must be approached as a whole, and as part of a larger plan, pre- and post-transaction dangers must be addressed.
Chargeback Mitigation Both Before And After A Transaction
Many retailers experience difficulties when separating first- and third-party threat sources. Criminal fraud is considered pre-transactional, whereas friendly fraud is post-transactional, which is a concern. By detecting bad actors along the transaction process, you can thwart criminal attempts, but friendly fraud is much more difficult to “prevent” in the absence of effective fraud protection tools.
The possibility of pre- or post-transactional merchant mistakes makes issues more complicated. For instance, the billing description you choose before ever completing a sale might have just as much of an impact on chargeback issuances as how you manage customer service after a transaction. However, this does not imply that there is a distinct difference between these chargeback sources.
Consider chargeback danger sources as a spectrum to make sense of them. On one end, we have intentional fraud by merchants; on the other, we have intentional cardholder abuse, sometimes known as cyber shoplifting. There is a wide range of potential dangers between those two points, many overlapping significantly. For instance, there is a significant link between merchant error and friendly fraud. Both of these factors are present in many chargebacks.
To give an example, suppose a cardholder initiates a chargeback because they failed to spot a valid transaction on their billing statement. It suggests friendly fraud because the customer ought to have made an effort to get in touch with the seller first. The merchant, however, should have had a distinct, clear billing descriptor, which is a sign of merchant mistake.
It can be perplexing when chargeback sources are so ambiguous. Additionally, it’s a concern because it generates false information about chargebacks, which could force you to employ a futile tactic. As a result, it becomes increasingly difficult to secure your company.
Key Takeaway:
The following should be crystal clear: chargeback management does not have a straightforward formula.
You must develop a plan that distinguishes between pre- and post-transaction concerns as well as between various chargeback causes, such as first-party fraud, merchant error, and third-party fraud. Learning how those chargeback sources interact and affect one another is equally crucial. Unavoidably, how you respond to threats like criminal fraud will affect how you handle friendly fraud and merchant error.
The e-commerce chargeback management firm assists merchants in improving their fraud prevention strategies without raising the number of erroneous declines, and they assist you in reducing the cost of fraud to zero.
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