Lacking Resources, Merchants Get Clobbered by Friendly-Fraud Chargebacks

Lacking Resources, Merchants Get Clobbered by Friendly-Fraud Chargebacks

February 20, 2020

Friendly fraud is the number one cause of chargebacks according to new research from Chargebacks911. The study of over 200 online, multichannel and mobile commerce merchants also revealed merchants are struggling to manage chargebacks, and the majority of respondents feel they lose most of their cases because they lack the knowledge and resources necessary to handle them.

More than half (56 percent) of all respondents say instances of friendly fraud are up over the past three years. That’s compounded by the fact that identifying friendly fraud is the hardest part of a merchants’ chargeback management, with 31 percent citing it as their biggest challenge. Disputing chargebacks was second at 29 percent.

“From previous research we’ve conducted, we’ve found that friendly fraud increases at an approximate rate of 41 percent every two years,” Monica Eaton-Cardone, COO and co-founder of Chargebacks911, told Card Not Present. “This ties in with what merchants are now telling us in our latest report. We know that this type of fraud is the biggest contributor to chargebacks and is having a devastating impact on businesses’ margins.”

Merchants Don’t Know Which Chargebacks to Dispute—or How to Dispute Them

The challenge for merchants lies in resources, according to the research. Survey respondents that do not dispute chargebacks were asked why not. The most common responses included a lack of sufficient resources and belief they couldn’t win any of their representments even if they tried.

“During our research, we found that identifying friendly fraud topped the list of the hardest things about managing chargebacks. This poses serious problems for those looking to combat them since, to know how to respond to chargebacks, a business must understand what is causing them,” said Eaton-Cardon. “If a merchant can’t detect friendly fraud, it will refund the customer to resolve this dispute. This means that merchants are refunding unjust disputes a lot of the time—opening themselves up for future attacks by looking like an easy target.”

Eaton-Cardone said merchants are also struggling because they don’t know how to go about the dispute process. Many are unsure how to initiate the process, and others noted they weren’t certain what documents were required.

“Merchants should speak to their acquirer to confirm what processes they need to follow and keep detailed transaction records that are easy to recall quickly while pulling evidence together,” she said.

Lack of Resources, Education are Hindering Chargeback Challenges

Eaton-Cardone also noted that the lack of resources and knowledge only sets merchants up for more issues down the road.

“Not challenging friendly fraud is a serious issue—40 percent of customers that commit it will do so again in the next 60 days.”

But many merchants are also not using resources and solutions available to them. The research found that those who use third-party solutions had a dispute win rate roughly 20 percent higher than those who don’t. Still, adoption rates of these tools are low.

“Visa released a plug-in tool, Visa Merchant Purchase Inquiry (VMPI), when it updated its chargeback rules in April 2018. Merchants can use this tool to send additional details before a complaint is ever raised by the customer; so obvious customer inquiries can be filtered out before they escalate into a chargeback,” said Eaton-Cardone. “It also gives issuers more resources with which to respond to chargebacks and the chance to communicate with the merchant. However, just 2 percent of the merchants we spoke with have adopted this solution.”

In hopes of reducing the number of chargebacks, Visa and Mastercard introduced new rules in the last year. But these appear to have made no significant difference for merchants as 82 percent said that Visa’s Visa Claims Resolution (VCR) had little or no impact on chargeback management. Only 19 percent noted a decline in Visa chargebacks after VCR, while over half (55 percent) said they didn’t believe there was a decline.  Just 42 percent were aware of Mastercard’s Dispute Resolution Initiative (MDRI).

“While the lack of adoption of Visa’s VMPI tool could have contributed to VCR’s dampened effect, it is clear that more education is required surrounding chargeback rules,” said Eaton-Cardone.

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Joan Goodchild

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