So, your merchants came back to you to ask why their estimated profits are steadily declining. Why their actual profits are way lesser than their projections?
Before suggesting the next steps, you check their account statement to realize that a couple of their customers have filed chargebacks against their deliveries. You come to the conclusion that the merchants are victims of friendly fraud. What do you do?
A previous blog covered the critical details of fraud prevention and detection for faster payment systems. This blog explains the different types of chargebacks, friendly frauds, and how to prevent them.
A chargeback is a paid amount returned to the payer, a debit/credit cardholder, in case of a disputed transaction. Let’s understand this with an example.
A consumer purchases a sofa set from an online furniture store for $1500 via a debit/credit card transaction. After delivery, the consumer realizes that the sofa set is not up to the correct quality standards or is generally not satisfied with the purchase. Now, the consumer can request a chargeback from the card issuer on account of an unsatisfactory product. After assessing the situation, the card issuer processes the chargeback, canceling the transaction and moving the money back from the merchant account to the customer account.
Visa, Mastercard, American Express, and other card issuers usually have strict guidelines around chargeback policies and entertain specific requests only. Learn about the chargeback policies of the top card issuers below:
The merchant delivered a subpar product/service, or the customer had unrealistically high expectations. Card issuers generally classify merchant error chargebacks in gray areas. Avoiding these chargebacks is challenging and involves a lot of back and forth between the consumer, card issuer, and merchants.
This type of chargeback is a conscious attempt to steal from the merchant. The card issuers rule such frauds in favor of the merchant and do not process the chargeback request.
We will discuss friendly fraud chargebacks in detail in the next section.
Merchant fraud is a conscious attempt by the merchant to steal from the customer. A merchant may commit fraud by delivering defective products or promising specific results and not delivering up to the promised standards.
Such fraud/chargebacks are committed neither by the merchant nor the consumer but by a third party. They usually include personal information or card theft to carry out unauthorized transactions.
Chargeback abuse is prevalent in some industries. In such a chargeback scenario, the customer intentionally carries out a card transaction to cause financial loss to the merchant or turn a profit by unfair means. An example of such a chargeback includes customers ordering products online with an intention to file a chargeback even if they received the product in perfect working condition. Customers initiating such chargebacks often cause payment disputes and misuse their privilege as a cardholder.
Chargebacks are unnecessary costs that slow down business. Thankfully, fintech companies and payment processors have technologies that help with chargeback fraud prevention. Here are a few ways merchants can prevent chargebacks:
Apart from identifying and minimizing fraud, the merchant should double-check all important transactions before processing them. A merchant should ideally inform the card issuing bank and payment processor within the time limit after detecting a fraudulent chargeback transaction. Immediate action gives the merchant the upper hand while handling customer disputes.
Customers cause a friendly fraud, aka a friendly fraud chargeback, when they file for a chargeback for a legitimate transaction, either accidentally or deliberately, instead of trying to get a refund the usual way. Friendly fraud is a type of chargeback activity. There are primarily two types of friendly fraud cases that merchants regularly encounter:
Customers might cause an accidental friendly fraud in the following ways:
Customers might cause an intentional friendly fraud in the following ways:
Banks often go through the customer’s historical transaction bank account data when they request a chargeback to ensure that they are not misusing the system. Typically, the card issuers have an incentive to take the customer’s side in a chargeback dispute to keep them happy. However, if the banks find that the customers are misusing their credit cards, they take the necessary actions against them. Learn more about the consequences of a deliberate friendly fraud for consumers.
Merchants are typically the ones that suffer the most losses in friendly chargeback fraud. Here are some ways they can avoid such fraudulent behavior:
Customizable technology plays a significant role in helping a merchant prevent friendly fraud and unnecessary chargebacks. iCheckGateway.com is known for offering completely customizable hosted payment portal solutions. Merchants can collect the following additional information for payment processing with our technology:
Moreover, our customizable email invoicing and SMS invoicing solutions help merchants customize the billing descriptors and messages so that customers do not file for an accidental chargeback. We also support merchants with virtual terminal solutions that help merchants create a digital record of transactions for easy dispute handling.
Partner with us to help your merchants prevent fraudulent chargebacks and adopt leading innovative solutions to take their business to the next level.