Supply Chain Logjams Could Fuel Friendly Fraud This Holiday Season

Supply Chain Logjams Could Fuel Friendly Fraud This Holiday Season

December 2, 2021

By Ofir Tahor, co-founder and CEO at Justt

There’s nothing more frustrating than spending hours shopping online, finally finding the perfect gift, quickly placing an order, and then waiting. And waiting. And waiting for a delivery that doesn’t turn up when it was supposed to.

Unfortunately, that’s an experience many shoppers could face this holiday season. With global supply chain logjams making it hard for both online and brick-and-mortar retailers to get the inventory they need, and labor shortages causing big problems for domestic distribution networks, plenty of consumers could find themselves facing delays, or even stuck with no gifts to give when the holidays come around.

That could cause big problems for merchants, because many disgruntled shoppers will wind up seeking chargebacks on their original transactions. Even in normal times, over a quarter of chargebacks are initiated due to delivery issues, and this year’s logistical chaos will only exacerbate that trend. According to a recent survey, 58 percent of retailers say they’ve seen chargeback rates increase in recent months—and of those, almost three-quarters blame supply chain interruptions or delivery delays for triggering the increase in chargebacks.

What’s more, while some delivery-related chargebacks may be valid, the vast majority will be “friendly fraud”—improper transaction reversals that will cost retailers a huge amount of money. Here’s what sellers need to know about handling chargebacks this holiday season.

What are customers entitled to?

First things first: it’s obviously terrible if customers don’t get their products on time, and it’s important to acknowledge that consumers have clear rights when it comes to delayed shipments.

Under Federal Trade Commission rules, retailers are obliged to ship products when they say they will, or within 30 days of an order if no specific shipment promises were made. If there’s a delay, sellers are obliged to let consumers know and give buyers a chance to cancel in exchange for a full refund.

If customers don’t respond, businesses can assume the transaction remains valid as long as the product ships in less than 30 days. If the delay goes beyond 30 days, the retailer is obliged to cancel the order and give a refund, even if the customer hasn’t requested one.

If a retailer doesn’t stick to these rules, and doesn’t ship the product on time or offer a refund, then customers have the right to request a chargeback and have the original transaction canceled by their financial institution.

What actually happens

That’s how things are supposed to work: the seller takes responsibility, the consumer makes an informed decision, and either they get their product or they get a refund.

The problem, of course, is that as we get closer to the holidays, shoppers will get antsier and antsier about their missing orders. With news reports about supply-chain chaos feeding their anxiety, some shoppers will seek to cancel orders they’ve placed—potentially even ones that aren’t actually delayed—in order to place orders elsewhere or buy products in person.

The reality is that only one in 20 customers turn to the merchant for help if there’s an issue with their order, and over four-fifths view chargebacks as a convenient way to handle problems. While some customers will use proper channels to cancel orders, many more will wind up using chargebacks instead of reaching out to the original seller, or will turn to chargebacks if the seller’s return policies don’t allow for order cancellation.

With economic pressures and inflation leaving shoppers strapped for cash, far more customers will take matters into their own hands and request chargebacks, whether or not they’re actually entitled to them. Other shoppers who face delays may fail to respond to messages from sellers offering them the opportunity to claim a refund—but will then request chargebacks when their delayed orders arrive after the holidays are over. The bottom line: this season’s supply chain chaos will make consumers more anxious and more frustrated.

Reduce your risk exposure

So how can sellers reduce their risk exposure this holiday season? Well, it helps if you can avoid delayed shipments and inventory shortages in the first place, of course. To whatever extent you can, aim to ensure that your warehouses are well-stocked and that your e-commerce platform uses up-to-date inventory and shipping information when managing sales.

Communicating proactively with your customers can also go a long way toward reducing unnecessary friction. Make sure that you clearly show the cut-off dates for pre-holiday deliveries when customers place an order, and be sure to give your team plenty of leeway so that you can actually deliver on those promises.

If the worst happens and orders are delayed, be sure to let your consumers know what’s going on, and to keep track of whether consumers have received, opened, or responded to the notifications you’ve sent. Consider also using promotions, freebies, or special offers to ease the frustration your customers are feeling: store credit, expedited shipping, free merchandise, or other extras can prompt shoppers to accept delayed delivery rather than requesting a refund or disputing their transaction.

Push back against chargebacks

No matter how well you handle things, though, some of your customers are going to wind up unhappy—and a substantial portion of them will wind up using (or abusing) the chargeback system. That’s a problem, because given the complexity of the chargeback process few retailers have the means to track and respond to disputes in a timely manner, and many wind up simply writing off the cost of bogus transaction disputes.

With chargebacks soaring this holiday season, though, simply letting things slide isn’t a sound strategy. Businesses need to look for smarter approaches—such as working with third parties to automate and streamline their chargeback mitigation strategies—in order to push back and reduce their risk exposure. Using new AI technologies and industry-specific expertise, well-run mitigation services can help companies successfully contest fraudulent charges, while freeing up employees’ time to improve the customer experience.

Unfortunately, chargebacks will always be with us. But organizations don’t have to simply eat the cost of friendly fraud this holiday season. With careful planning, proactive communication with customers, and a smart strategy for combating fraudulent disputes in a timely manner, it’s possible to keep the revenue impact of friendly fraud to a minimum, and ensure that supply chain chaos doesn’t take a disproportionate bite out of your bottom line.

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