The Latest Trends in Chargeback Fraud
According to recent Chargebacks research, merchants have faced unprecedented pressure over the last year due to shifting regulations, an uncertain economy, and the need to diversify their sales channels and strategies. Chargebacks are not the only problem merchants face; friendly fraud has also become a growing problem. Fewer than three per cent of merchants have been successful in fighting disputes of chargeback fraud. This article will discuss the latest trends in chargeback fraud and their impact on merchants’ bottom lines.
Increase in card-not-present transactions
The Internet has done wonders for small businesses. It allows them to reach customers worldwide and opens up an avenue for fraudulent activity. Online and phone transactions don’t require a physical payment card to complete a transaction. Instead, the customer must provide a card number and other easily obtainable information. These card-not-present transactions are referred to as “card-not-present” transactions.
The advantage of this situation is that it provides a much more accessible avenue for criminals to steal card numbers. Many victims of card-not-present transaction fraud will not realise that their funds have been stolen until they get their bank statement, which can be months after the initial fraudulent payment. Fraudsters often gain access to payment information through phishing attacks or database breaches. Once they have the information, they sell it on the dark web to other criminal organisations that perform actual CNP fraud.
This makes card-not-present transactions even more common than traditional in-store fraud. While a high number of chargebacks can negatively impact some merchants, most merchants saw a reduction in their chargeback-to-transaction ratio. The increase in card-not-present transaction fraud statistics resulted from new government regulations and social distancing requirements.
Online merchants benefited greatly from this decrease.
In addition, the decrease in the ratio of chargebacks to total sales indicates that merchants are taking steps to minimise the risk of chargebacks. Online payment transactions have become increasingly popular and paved the way for an increase in card-not-present transaction fraud. Despite the benefits of online payment methods, online fraud is a significant problem. The pandemic has increased the use of contactless cards and the safety concerns accompanying them.
With these concerns, CNP fraud has increased in popularity. According to Aite Group, CNP fraud cases will increase by 16.4% in the U.S. by 2023. Increase in friendly fraud According to a report by merchant fraud management company Chargebacks911, one out of every two transactions on the internet results in a chargeback. These disputed transactions cost merchants an estimated £2 billion annually. And with an estimated 33 million chargebacks predicted by 2020, this trend will only increase. The first step to reducing chargebacks is to learn how to combat friendly fraud.
An increase in friendly chargeback fraud statistics is nothing new for merchants.
The food and beverage industry is especially susceptible to this problem, as it is less equipped to recover its losses. Some brick-and-mortar businesses don’t realise a dispute has occurred until a few days later when the chargeback amount is relatively low. However, a recent fund recovery company MyChargeBack revealed that 68 per cent of chargebacks in this sector are friendly fraud. Most chargebacks that result from friendly fraud are low-dollar disputes, meaning that the chargeback amounts are relatively small.
In some cases, the chargeback dispute is legitimate. The merchant has failed to provide the goods or services. A friendly chargeback can result from many reasons, including buyer’s remorse, transactions submitted by a relative, and confusion about a merchant’s policies. But, in some cases, cardholders may be deliberately abusing the chargeback process. This practice is referred to as “cyber shoplifting.” While merchants are generally expected to honour chargebacks in fraud cases, the ability to dispute a transaction is a fundamental right for consumers.
For example, a sudden rise in order size, or an unexpected increase in frequency, could be a sign of friendly fraud. This can be easily prevented with the proper tools and methods. For example, by using a spreadsheet to track shopping behaviour, you can identify unusual patterns that indicate friendly fraud and flag them as suspicious.
Increase in high-value chargeback claims
Many small businesses struggle to recover from the negative reputation of chargebacks, and it can be challenging to quantify the threat. To accurately estimate the level of chargeback risk, businesses need input from merchants, banks, and card networks. The problem is that these parties tend to keep crucial information to themselves out of fear of security issues and a lack of understanding. This lack of knowledge is exacerbated by the fact that merchants don’t want to share their data.
To assess the impact of chargebacks, merchants should use the chargeback-to-transaction ratio. This metric tells businesses what percentage of transactions turn into chargebacks. Between 2017 and 2020, the ratio dropped by 21.6% and 58.2% in 2017. The data shows that the chargeback-to-transaction ratio decreased from 79.2 to 71.8 and that merchants need to adopt a proactive strategy to minimise the risk of chargebacks. In addition to fraud, chargebacks can also be triggered by defective goods or fraudulent transactions. Understanding the reasons for chargebacks will help you reduce them.
Ensure that your customers receive the goods they ordered; otherwise, they’ll dispute the transaction.
This can be easily mitigated by tracking shipped goods. If the customer doesn’t receive the ordered goods, they’ll dispute the transaction and claim the merchant is not responsible. The good news is that chargeback facts provide valuable clues to the situation. In the U.S., federal law mandates that consumers have the right to dispute a transaction. Nevertheless, many merchants are unaware of these laws and therefore have no practical method for minimising chargeback risk.
However, if you recognise friendly fraud, you’ll likely be more inclined to turn to a third-party chargeback solution. Impact on merchants’ bottom line The financial impact of chargeback fraud is enormous. In 2018, it cost £31 billion to merchants. This includes friendly and fraudulent chargebacks, affecting every part of the business, from shipping and handling costs to wasted transaction processing fees.
Additionally, chargebacks can lead to merchant account termination. So what can be done to prevent them? This article will explore the potential cost savings and how chargeback fraud can affect your bottom line. Merchants are worried about chargeback fraud because they think they’re too expensive to prevent. Yet, many merchants do not think avoiding chargeback fraud entirely is possible.
Moreover, chargebacks fall into three general categories: friendly fraud (doubting a charge knowingly), actual fraud (fraudulent charges), and merchant error: the higher your chargeback rate, the higher your credit card processing fees. While chargeback fraud is a severe problem for merchants, most of it is friendly. This is where a consumer requests a refund for a product or service. Experts believe that friendly fraud will increase as consumers become more cautious about their spending habits.
A recent global payments advisory firm report found that friendly fraud is becoming more common, especially among small business owners. The impact on merchants’ bottom line depends on how quickly merchants address disputes. While many merchants know the chargeback costs, many do not consider the hidden expenses associated with chargeback fraud. While chargebacks are a big problem, many merchants are surprised to learn that up to 70% of these cases are friendly chargebacks.
Many consumers dispute a chargeback due to a mismatch in price or product.
Likewise, chargebacks can cause merchants to lose their merchant accounts. Tools available to combat chargeback fraud A good chargeback fraud prevention tool should have the features and benefits that merchants are looking for. In the case of chargebacks, a full-stack payment processing platform such as Bolt, which incorporates top-notch fraud protection, can be a great solution. This platform improves customer experience and combats fraudulent activities while offering a 100% fraud guarantee.
However, if you’re looking for a chargeback prevention tool that’s simple to use, you should look at the ones that combine fraud protection and payment processing. First of all, you should have a good understanding of how chargebacks are processed. Generally, there are three types of chargeback fraud: third-party fraud and friendly fraud. Third-party fraud involves bad actors impersonating legitimate users. Friendly fraud is the opposite, which involves cardholders requesting a chargeback without a valid reason.
The tools available to combat chargeback fraud vary depending on the type of chargeback, and each type of dispute requires a different solution. If you are looking for an effective chargeback prevention tool, you should look at the data provided by your pre-sale fraud detection tool. These tools can identify the source of friendly fraud, a common chargeback type. Then, you can use the data to generate a chargeback response. Unfortunately, chargeback response tools don’t work well for malicious fraud since they can’t detect fraudulent transactions before they’re made.
Chargeback Fraud – To Summarise
The best way to fight chargeback fraud is to accept that you’re losing money and not fight it – but it’s worth it to have some peace of mind. Another way to combat chargeback fraud is to integrate a chargeback tool into your eCommerce platform. Signifyd’s fraud prevention tool allows for the automatic sharing of transaction data and automatically populates a detailed response. It uses an extensive database of rules and regulations and analyses each transaction to find the most compelling argument for the chargeback.
It also helps combat friendly fraud because it automatically submits the response. The automated evidence compilation feature also makes it a valuable tool for businesses to combat friendly fraud.
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