A chargeback can be defined as a dispute in payment. If you utilize Paypal for online transactions, you should be familiar with a chargeback or how to resolve a payment dispute. It happens in a situation where a cardholder queries a specific transaction and requests their card-issuing financial institution to reverse the payment. The essence of instituting a payment dispute is to protect consumers from transactions that they do not initiate or authorize. Nevertheless, it could create a big issue, not only for the accounting and auditing department of your organization but also your entire business, if they are issued by mistake.
The moment a chargeback occurs, the business holds the disputed fund until the card-issuing company has settled the issues, and the funds held have been sent back to the cardholder. In a situation where your financial institution rules in your favor, that disputed fund will be sent back to you. This is not so easy and can be stressful and time-consuming. It can sometimes involve paperwork and necessary documentation.
Is a Chargeback a Fraud?
While the chargeback procedure is established to protect sincere clients, criminals and fraudsters can utilize the chargeback protection to commit return fraud.
What is Chargeback fraud?
Chargeback fraud, also referred to as a friendly fraud occurs when a client obtains a product and claims that he or she has never received it. This way, the client keeps the item and files for a dispute. This can be a simple fraud attempt by clients as most merchants would sometimes not bother to pursue the disputing process and simply offer a refund.
This is more challenging if you are a startup. Small businesses are prone to this type of fraud and could be very significant on their bottom line. The Association of Certified Fraud Examiners affirmed that 28.8 percent of most fraud cases impact small businesses having one hundred or fewer employees.
Startups can encounter different kinds of return fraud. But chargeback fraud is familiar with most online businesses. It could be very devastating because:
a. You lose your product
b. You lose your money
c. You pay an extra chargeback fee.
Chargebacks can cause shrinkage in inventory and reduce profits. This is why it is crucial to avoid and dispute fraud. If you frequently experience chargebacks, your ability to receive payments may be disabled by credit card processors.
What Are The Challenges of Fighting ChargeBack Fraud?
Many statistics now buttress the prevalence of this fraud. Why the, can this epidemic not be curtailed? There are many reasons clients continue to win fraudulent chargebacks.
Reason codes are not accurate indicators of a transaction dispute. To file a chargeback, the client or cardholder is required to make-now in a fraud situation, a false claim against the order. Financial institutions flag and assign a pre-set reason code based on the reason provided by the client filing the dispute.
A lot of merchants would accept the assigned code as legitimate and thus make no effort to identify the real cause of the dispute. This makes them defenseless against chargeback fraud. The truth is that most fraudulent chargebacks are filed by satisfied clients. Merchants rarely detect their clients are dishonest.
When you fail to challenge these illegal claims, you practically authenticate the fraud being perpetrated over and again. You will need an expert to detect chargeback fraud if you don’t want the issue to affect your reputation and profitability.
Also, merchants do not even appreciate the significance of this issue. It would have been easy to fight if they do. They would need to devise means to understand the real rationale as touching the reason code.
Recent research discovered that 81 percent of cardholders filed a chargeback based on convenience. It was more comfortable to ask for a refund than to contact the merchant.
In this present busy society, clients would naturally gravitate towards the cheapest, fastest, and most comfortable route available. Many people can’t differentiate between a chargeback and a refund. They don’t even have a clue as to the kind of impact it has on businesses.
Obsolete Chargeback Regulations
The regulations relating to chargeback were formulated before the internet became prominent. They were not designed to adapt to an ever-changing and dynamic, technology-driven marketplace.
Technologies and purchasing options are dynamic. Thus fraud approaches should frequently adapt proactively. Chargeback processing laws have become obsolete. They haven’t evolved at a comparable pace; in fact, they haven’t evolved at all.
Past approaches cannot solve the problematic present issues; not to talk of future realities. This imbalance between innovate promotional tactics and chargeback processes is complicating and aggravating the problem. If wholesale adjustments are not implemented in the payment industry, the issue will continue to worsen.
On the part of banks, they don’t dedicate time to verify. Like any business outfit, the customers are always right. Banks will typically go the extra mile to please the customers. This approach is perfect for customer relations but unfair for businesses.
As the cases of chargebacks continue to increase, the speed required to process them also increases significantly. Banks would claim that they lack sufficient human resources. This usually leads to the disputes not being properly investigated before concluding.
Merchants don’t have what it takes to fight back. The do-it-yourself approach demands huge investment with little chance of positive outcome. Merchants who have been able to identify chargeback fraud as a significant cause of losses have accepted it as something inevitable.
Meanwhile, ignoring this, fraud can lead to issues beyond a reduction in profit. Failure to fight back can have long-term consequences and irreparable damage to the sustainability of the business.
What Causes Chargeback and Common Prevention Strategies?
Some culprits exist behind every payment dispute. However, there are guidelines and procedures to follow to avoid them.
In a situation where the cardholder notices a charge from your enterprise but hasn’t purchased anything from you. Luckily, there are many ways to avoid this.
How to avoid the dispute
a. You can utilize secure POS to receive contactless payments such as Apple Pay.
b. Request clients with chip cards to dip cards instead of swiping them.
c. Educate your employees on the best practices regarding accepting payment cards.
If a client or a cardholder does not receive the ordered item, or has been overbilled for the product or service, a dispute can be filed.
a. Save the tracking ID for each order and ensure it is accessible.
b. Utilize a delivery service that requires a signature before an item is received.
c. Update your listed price tags and ensure they are accurate.
In these scenarios, the cardholder or client returns the item to claim a refund. This type of issue may vary. Buyers can be remorseful, or the user can make a mistake while purchasing on the internet.
a. Ensure you have established a reliable framework in managing credits and returns.
b. State policies on sales such as refund, return, order cancellation conditions on the receipts and paste them for everyone to see on your store. This way, you will win several payment disputes if they arise
Dissatisfaction with the item or service
Some cardholders will generally file a dispute if they are not satisfied with the purchased product or service rendered. If it were to be a product, it could be a physical defect or an omission in the advertisement. Services could be more subjective, and it is usually related to quality.
a. Reply to client’s queries on time and with utmost courtesy.
b. Establish realistic expectations. Cardholders who receive products that are against what was advertised have legal rights to request a payment reversal.
Unrecognized Business Name
Legitimate purchases could be considered fraudulent for simple confusion. For instance, if your business sells bagels and coffee. Your shop is referred to as “Los Angeles Bakeshop,” but the registered business name on the receipts is ” LA Baker Enterprises.” If a cardholder sees deductions from LA Baker Enterprises, a firm they have never heard about, they may blow the whistle and file a dispute.
a. Prevent confusion by being consistent with your branding, especially on your invoice and receipts
Inability to nullify subscription
Recurring payments on subscriptions have their significance for cardholders and businesses; however, they can lead to the risk of disputes. Most times, a holder may not remember his or her subscription renewals and may issue disputes to nullify the payment retroactively.
a. In a circumstance where it is unavoidable to initiate recurring payments, let your clients or cardholders understand the implications before appending on the recurring transaction memorandum of understanding. You can secure a means of acknowledging this agreement and understanding with a tick box that represents a signature.
b. Make the billing frequency obvious, especially the sum, the refund, and policies relating to cancellations in the agreement.
c. Inform cardholders before the charging date. This will prepare them to decide whether to cancel the transaction or not.
To avoid a chargeback fraud, maintain a proper record of sales. Also, ensure you obtain shipping verification, as well as insurance. Then, keep the client history of being able to detect dishonest customers.
You could also use cash more and utilize a fraud detection device or a cash counter that includes a fraud detection feature.
Lastly, chargeback will remain a scam if you fail to take the proper actions. If you have been scammed and you want to recover your money back, click here.