Protecting Your Business From Chargeback FraudPayments 101

Protecting Your Business From Chargeback Fraud

Last Updated on March 22, 2024

The world of payments is full of way too many complicated terms and processes. The tangled web of connections, gateways, facilitators, and fees can leave anyone feeling lost in a sea of jargon. Chargeback management software that fits your needs is critical to minimize the harm to your profit margin. The average US retailer receives 1,740 chargebacks per month, with over half being fraudulent. The right chargeback management tools are essential to ensure your products and bottom line are kept secure.

First up: What are chargebacks? How do they work?

On paper, chargebacks are designed as a consumer protection measure. Originally, they were implemented with four key concepts in mind:

  1. If the consumer has been defrauded. For example, if your credit card details have been stolen and used to make purchases you don’t approve of, you may request a chargeback to the bank to recover your lost funds.
  2. Ordered product that never arrived. Something you might have experienced firsthand! For example, at the beginning of the COVID-19 pandemic, consumers rushed to purchase home gym equipment online to ensure they could remain in shape. This led to many opportunistic scammers creating Amazon storefronts, ‘selling’ equipment, and submitting a false shipping code to Amazon. When it became apparent products were not going to arrive, customers may have been required to request a chargeback.
  3. Damaged or defective goods. If your ordered product arrives in a manner incongruent with what was described, you can request a chargeback.
  4. Incorrect charges. This most frequently occurs when a small business enters a cost incorrectly – An extra press of the ‘0’ can turn a customer’s $10.00 purchase into a $100.00 purchase, warranting a chargeback.

Sadly, over time, unscrupulous actors have found ways to exploit these consumer protections. For example, you as a merchant sent your products to be delivered but a dishonest individual says they were never received. The individuals may issue a chargeback, and the bank will comply. Suddenly, you have no product, no payment for the product, and a chargeback fee on top of it all. As a merchant you can, of course, contest the chargeback, but the burden of proving that your customer did receive their ordered goods is time and cost that may not be afforded for each case.

Wait, so are chargebacks just refunds?

No. Not quite. While they’re similar in nature, chargebacks are usually initiated by the consumer, as a direct request to their card service provider. In contrast, refunds are typically issued by the merchant to a customer directly.

Not the fees!

Reviewed businesses have posted average losses of 4.4% in 2019. Over 19 billion dollars in lost revenue, all due to chargebacks and chargeback fees. PayPal, one of the largest alternate payment methods globally, charges $20 per chargeback issue. Stripe, one of the largest payments processors in the US, charges $15. Even at the absolute average amount of expected monthly successful chargebacks (half the 1,740 listed above, so let’s say 870), the monthly cost to a consumer using Stripe could be equal to over $13,000 per month. While many chargebacks occur within 24-72 hours, until the issue can be resolved, the money is deducted from the merchant’s account and held in waiting, to ensure the consumer is protected in case the issue is determined to be the merchant’s fault.

There are two main types of fraud that result in chargebacks. Both legitimate fraud (i.e., the consumer intends to defraud you from the outset), or ‘friendly’ fraud. ‘Friendly’ fraud usually results when a consumer has a legitimate reason for a refund, such as:

  1. If the returns policy offered is complex, challenging, or time-consuming for the customer, or if the returns window has simply expired, they may opt to perform a chargeback. Likewise, if a product is faulty, the customer may quickly go through their bank’s phone application to request a refund in the form of a chargeback rather than re-engage in communication with the merchant.
  2. If the product fails to arrive, rather than reach out directly to the merchant, a chargeback will usually be requested in lieu of a back-and-forth email or phone. Furthermore, if there have been significant shipping delays and a customer no longer recognizes the order, they might charge back what they assume to be a mistaken purchase.

Taking charge of chargebacks

Ultimately, the best way to ensure your business is not a victim to extreme out-of-pocket chargeback exposure is through adaptive, responsive chargeback management software. With a Complete Merchant Solutions (CMS) merchant account with Nexio, Nexio’s technology can automatically notify you the moment a chargeback is processed against your account, and the dashboard will present all the relevant information in one easy screen. All the information pertaining to the original sale, transaction records and financial information will be right at your fingertips. All you need to do is upload any supporting documentation and click submit – you’ll have provided a comprehensive report to your payments back-end processors, all while minimizing both time invested, and money lost to fraudulent chargeback fees. Chargebacks can be a messy nightmare, but they don’t have to be. Nexio is here to help.

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