News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Guest Perspective: Playing Offense vs. Chargebacks

Guest Perspective: Playing Offense vs. Chargebacks

By Monica Eaton-Cardone, Co-Founder

‘Guest Perspective: Playing Offense vs. Chargebacks The term “chargeback” has become anathema in the merchant community. Visa and MasterCard spearheaded the concept in an effort to eradicate the identity theft and fraud aimed at consumers that accompanied the growth of e-commerce. Successful consumer-education initiatives armed innocent consumers with a weapon that promised a defense against these crimes. But, the power to reverse charges made to their accounts provided consumers with a powerful offensive tool to use against merchants in battles over the proper exchange of goods and services.

Although this seemed like a great idea at the time, the subsequent abuse of the chargeback option has resulted in a friendly-fraud epidemic harming not only merchants, but the very consumers the programs were designed to help. An increase in disputes generated by friendly fraud equates to higher costs borne by merchants.

The most visible effects of friendly fraud are higher merchant fees and the loss of merchandise value from non-recovered products. Those effects deplete retail profit, causing merchants to increase retail prices in an effort to recoup their losses and, ultimately, the consumer pays the bill (Ironically, one of the drivers of friendly-fraud induced chargebacks is buyer’s remorse centered on price-points consumers consider “too high.” But, the more these types of chargebacks infiltrate the marketplace, the less likely prices will be reduced, leading to…more friendly fraud!).

While “friendly fraud” sounds innocuous, it’s actually insidious. For every $100 in chargebacks filed, the average merchant pays $270 in related costs. Also, Visa and MasterCard may levy fines or rescind a merchant’s ability to process credit or debit cards if their chargebacks exceed 1 percent of transactions in a given month. For e-commerce business owners, no credit-card processing means no business.

Friendly Fraud vs. Consumer Fraud

‘Guest Perspective: Playing Offense vs. Chargebacks Friendly fraud happens when a consumer or family member purchases a product, receives the goods or services related, and contacts his or her bank instead of the merchant to obtain a refund (usually indicating an “unauthorized transaction”). Banks and credit-card companies are not bound by any law to contact the merchant if the transaction was made in a CNP environment. In other words, if the purchase was made through the Web, this qualifies for an immediate chargeback based on the subjective decision to believe the cardholder’s claim.

Consumer fraud, by contrast, happens when a merchant engages in deceptive practices that result in the financial or property loss of the consumer. The consumer is usually under the impression that they are engaged in a legitimate business transaction until after the damage is done. Essentially, friendly fraud and consumer fraud are polar opposites, yet, according to the Trustwave Global Security Report 2013, 90 percent of e-commerce merchants believe they are synonymous.

In the merchant processing industry, “guilty before proven innocent” is standard operating procedure. When a chargeback is initiated against the merchant, there is an irreversible fine and a negative statistic assigned to that merchant. The merchant also pays immediately for the cost of the transaction, while the cardholder reaps the reward of an often immediate, “temporary” refund (temporary only if the merchant spends extra money and time to diligently fight the case according to Visa and MasterCard guidelines and win back these previously debited funds).

But even if the merchant fights the chargeback and wins back a portion of the funds, it often does not end there. The cardholder has the right to appeal the case, which could result in the merchant paying an additional fee to have the case re-examined—a fee often more than the value of the original transaction.

In the end, the most likely result is the cardholder gets a refund, gets something for nothing and experiences no consequences. Meanwhile, the merchant pays any and all fines and loses not only the purchase amount but the product as well. According to the LexisNexis True cost of Fraud study, it is estimated that only 25 percent of all e-commerce merchants defend themselves against friendly fraud even though 100 percent become victims in today’s society.

Defending Against Friendly Fraud

‘Guest Perspective: Playing Offense vs. Chargebacks So what can merchants do to protect themselves from friendly fraud? Providing 24/7 customer service is one tool for defense, and companies that communicate regularly with consumers (e.g., via a monthly newsletter) experience fewer instances of friendly fraud.

According to ABC News, 44 percent of Wal-Mart’s customers were unsatisfied with Wal-Mart’s customer service. (See, “Customer Service: The New Proactive Marketing,” Huffington Post, ). Michael LeBoeuf, the author of “How to Win Customers and Keep Them for Life,” states that a typical business hears from only 4 percent of its unsatisfied customers. If every company performed like Wal-Mart, this would mean that 44 out of every 100 customers are not satisfied but only two of them contact the merchant providing an opportunity to resolve any issues that crop up.

And, if you made the sale through your Website, your chances of receiving a chargeback as a result of an unsatisfied cardholder (who contacted their bank instead of you) approach 100 percent. So, if two of the 44 unsatisfied customers call you, and only half of the remaining customers contact their bank, you can see how quickly the score changes — and how easy it is to become trapped by the “alternative refund” of the friendly-fraud chargeback.

To survive as an e-commerce merchant, there really is only one recourse: Merchants must be smarter and better if they are going to survive. This means better customer service, real-time chargeback monitoring and paying attention to the details.

Chargebacks will come in, and there are defenses available to win back associated funds—but unless a merchant understands how to play offense, the odds are against it and the innocent consumers.

Monica Eaton-Cardone is the Co-founder of Chargebacks911, which offers both response and resolution services for chargebacks and cardholder disputes. The company works with merchant clients to help them keep their dispute rates down and retain their ability to accept credit cards. For more information, visit

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Daniel Leibovitch