First-Party Misuse
The chargeback process was invented to protect consumers from fraud, but in the wrong hands, it can become a tool to perpetrate fraud on merchants. Whether you call it as chargeback fraud, friendly fraud, or first-party misuse, illegitimate chargebacks can be a serious drain on a merchant’s time, resources, and revenue.
First-party misuse is easy to get away with, and many consumers consider it a justified response to an unsatisfactory purchase. First-party misuse is the leading cause of chargebacks for many businesses, contributing to excessive chargeback rates and penalties that can include termination of the merchant account. What are the best ways to protect your business from first-party misuse?
- What is First-Party Misuse?
- Why Does First-Party Misuse Occur?
- How Can Merchants Fight Back Against First-Party Misuse?
- What Can Merchants Do to Prevent First-Party Misuse Ahead of Time?
- Conclusion
What is First-Party Misuse?
First-party misuse refers to situations in which fraud is perpetrated by an actual customer, rather than a third party hiding behind a false identity. The most common and pernicious form of first-party misuse in the retail sector is chargeback fraud, AKA “friendly fraud.”
In this context, first-party misuse describes chargebacks that are based on false or erroneous dispute claims. The cardholder calls their bank, asks for a chargeback that they aren’t actually entitled to receive, and the bank grants it to them.
As many as three quarters of all chargebacks may be attributable to first-party misuse. These chargebacks show up for merchants under a variety of different reason codes, and may appear to be legitimate at first glance. Only by looking deeper and researching the transaction can merchants determine whether or not a chargeback is truly valid.
Why Does First-Party Misuse Occur?
First-party misuse is often carried out intentionally as a way to defraud merchants, but it can also happen due to misunderstandings about how the chargeback process is supposed to work, or when a cardholder fails to recognize a legitimate charge on their statement.
When carried out with deliberate intent, first-party misuse is effectively a form of cyber-shoplifting. The customer makes a purchase, then gets their money back from the merchant by obtaining a chargeback under false pretenses.
For the merchant, this is even worse than regular shoplifting, because it comes with added fees and an incremental uptick to the chargeback ratio that the card networks are monitoring.
It’s often the case, however, that cardholders don’t think of themselves as committing fraud when they engage in first-party misuse.
They might wrongly assume that disputing a charge is no different than demanding a refund from the merchant, or they may believe that they have a valid chargeback case when in fact they do not, and embellish the facts to get their bank to go along with it.
For example, a customer might request a chargeback because they didn’t like the product they purchased, or because their child snuck in some in-app purchases on a mobile game. Neither of these are valid reasons for a chargeback, but the customer might think otherwise.
Illegitimate chargebacks can also occur due to honest mistakes, such as a joint cardholders failing to communicate about a purchase, or a cardholder seeing a billing descriptor they don’t recognize on their monthly statement and wrongly assuming it to be fraud.
How Can Merchants Fight Back Against First-Party Misuse?
First-party misuse can be difficult to predict, because it usually originates with a valid purchase that will seem entirely ordinary. These transactions aren’t accompanied by telltale red flags the way third-party card fraud often is.
Every time you receive notice of a chargeback, you should investigate the disputed transaction and try to determine whether or not the cardholder’s claims are truthful.
If they are, and they match the criteria of the chargeback reason code, the chargeback is valid and should be accepted. If the claims are incorrect or exaggerated, the chargeback is likely the result of first-party misuse—and you can fight it.
Fighting invalid chargebacks is called chargeback representment. You do this by presenting the disputed transaction a second time, along with documented evidence that disproves the cardholder’s false claims. Every chargeback reason code should specify what sort of evidence is needed for successful representment.
The formula for winning at chargeback representment is to keep detailed and accurate transaction records, document your communication with customers, and respond to chargebacks within the allowed timeframe.
When you choose your battles carefully and fight back with the right evidence, you can get first-party misuse chargebacks reversed and recover your revenue.
What Can Merchants Do to Prevent First-Party Misuse Ahead of Time?
As important as it is to fight illegitimate chargebacks, it’s more efficient and cost-effective to prevent them from happening in the first place. Deliberate cyber-shoplifting attempts can’t always be anticipated, but erroneous acts of misuse are more easily preventable.
Many unintentional acts of friendly fraud result from unfamiliar or confusing billing descriptors. For example, they might list the merchant’s LLC instead of the storefront name that the customer would know them by. Fixing up your descriptors and including URLs and other contact details can help prevent these chargebacks.
Recurring billing charges are another common source of inappropriate disputes. Customers may forget that they signed up for an irregularly-occurring charge, accidentally let a free trial extend into the paid billing period, or get frustrated that they can’t easily cancel a service they no longer want.
You can address these problems by sending advance notice when you’re about to charge a card-on-file, and by providing simple self-service portals for account management and cancellation.
Excellent, attentive customer service can minimize the misuse that results from customer complaints related to product quality, delayed delivery, or unintentional digital purchases. When it’s easy for these customers to get ahold of you and work out a satisfactory solution, they’re much less likely to fall back on the chargeback process.
Lastly, don’t be afraid to block customers who try to abuse the chargeback process. Many of them will not hesitate to target a merchant over and over again for as long as they can get away with it.
Conclusion
Chargebacks can do a lot of damage to retail businesses, and first-party misuse often represents the lion’s share of the problem. If you’re looking for additional information about analyzing your incoming chargebacks and implementing a comprehensive chargeback management strategy, come visit Chargeback Gurus at MRC Vegas at the ARIA Resort & Casino March 6 to 9, or drop by our speaking session on first-party misuse at 3:45 PM on March 8.
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