3 Categories of Chargeback Causes
Card networks assign a specific reason code to every single chargeback they process. And though each unique network has their own set of codes, they all exist to do one thing: tell merchants and their acquiring banks what the “reason” behind the chargeback was.
Unfortunately, issuing banks always take the consumer’s word without question. They accept the cardholder’s explanation for the chargeback at face value and assign a reason code based on that account. Because many times the consumer is not being truthful, the reason code doesn’t quite line up with the real, true cause of the chargeback.
This hurts merchants and their ability to prevent and fight future chargebacks. Many assume that every chargeback with a fraudulent or not authorized reason code equals true criminal fraud or identity theft is at work. But this assumption can cost a merchant up to 25 percent more in lost revenues due to chargebacks.
As a merchant, conducting your own analysis of the root causes of your chargebacks is crucial to fighting and preventing them in the future.
We’ve found that those causes fall into one of three common categories: true fraud, friendly fraud and merchant error. Let’s look at all three in more depth.
True fraud is the result of hacking or identity theft. It means the charge was made via a stolen card (or card number) and without the cardholder’s prior knowledge or authorization.
Merchants are liable in cases of true fraud, as they should have processes and protections in place to safeguard their customers from hacking or theft.
True fraud typically accounts for just 10 to 15 percent of all chargebacks
Anywhere from 60 to 75 percent of all chargebacks are the result of “friendly” fraud, which occurs when a cardholder disputes a charge they knowingly and intentionally made. They might want their product for free, be unhappy with their purchase or service, or simply not want to go through a difficult refund process. Verifying the cardholder's identity during your checkout process can help prevent these types of fraud – or at least give you the evidence you need to fight a chargeback should one be filed.
Family fraud is also considered a type of “friendly” fraud and happens when a spouse, mother, father or other family member uses a card without their loved one’s permission.
The transaction shows up on the cardholder’s bank account or card statement as unrecognizable, and they dispute the charge, fearing true fraud is at work. To prove a chargeback is due to family fraud, you’ll need to provide evidence that the purchaser is related to the cardholder
Another 15 to 35 percent of all chargebacks are caused by merchant error, which means a charge was accidentally or erroneously made by the business. Merchant errors can include duplicate charges, wrong transaction amounts, incorrect invoicing or even just a failure to issue a refund on an agreed-upon timeline.
Merchants are liable for chargebacks stemming from their own errors, so disputing them is not an option in these scenarios.
Fortunately, realigning back-office operations and ensuring better quality control in payment processing can help prevent them
Determine the Root Cause of Your Chargebacks
Getting down to the root cause of your chargebacks is the first step to fixing internal issues and preventing future chargeback disputes.
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