The prevalence of fraudulent chargebacks, also known as “friendly fraud”, has a major impact on e-commerce businesses around the globe. It’s estimated that around 86% of chargebacks are most likely to be fraudulent.
This particularly hurts SMBs (small-medium businesses), as large enterprises are typically able to just swallow the costs. Small merchants, however, not only lose the cost of items, but also end up paying chargeback fees and potentially having their reputation tarnished.
In this article, we’ll explore how much damage chargebacks can cause to a small business’ bottom line, and discuss the best ways to combat the issue.
How Chargebacks Affect Small Businesses in the Digital Era
As e-commerce became even more popular during the COVID-19 pandemic, so did fraudulent chargebacks. It was estimated that chargeback fraud increased by 41% between 2020 and 2021, which is significant for SMBs and startups looking to offer and grow their business.
It’s also possible for scammers to double-hurt you by issuing a refund request to their bank, and also the business’ payment processor, in order to file a chargeback against both entities.
In essence, you’ll end up paying the refund twice, as well as paying chargeback fees. It’s also estimated that when someone performs a fraudulent chargeback, they’ll attempt so again within 60 days.
On a global scale, chargeback fraud accounts for around 0.47% of lost merchant revenue annually. That seems like a small number when applied to an individual business – if your online store grosses around $80,000 annually, 0.47% of that would only be about $376.
Many businesses now consider this simply the cost of doing business – and truly, chargeback fraud isn’t going to bankrupt your small business.
However, if you take into consideration all of the other added costs associated with dealing with chargeback fraud, including inventory loss and potentially higher credit card processing fees, chargeback fraud isn’t something you want to be lackadaisical about.
How to Defend Your Business Against Chargeback Fraud?
You have several options at your disposal. For starters, you should review the dispute policy of your payment processor, and the card issuer. So for example, if the cardholder uses Visa, you would dispute the chargeback via the standard fraud department of your processor, and also with the bank of the cardholder.
However, this doesn’t always work in your favor, and you’ll find yourself spending more time on disputing chargebacks, than actually preventing them.
If your business is often targeted by chargeback fraudsters, you need to implement a chargeback management strategy – here’s how chargebacks can be managed.
There are three fundamental sources of chargebacks. They are:
Criminal fraud: (using stolen credit cards)
Merchant errors: (policy oversights)
Friendly fraud: (Legitimate cardholders attempting fraud)
Each of these chargeback sources require different actions to block, reduce, or handle in a safe and effective way.
For reducing criminal fraud, you need to use fraud scoring, card network verification, and other various fraud detection methods. You should also partner with digital fraud prevention platforms that have a strong reputation, such as Microsoft Dynamic 365, Kount, Bolt, Riskified, and others.
For reducing chargebacks from merchant errors, it’s important to analyze each step of your sales process for chargeback triggers. For example, oversights in your return policy, not using delivery confirmation, neglecting customer complaints – these can all trigger chargebacks.
Finally, friendly fraud can be reduced by challenging chargebacks and escalating the disputes. Particularly useful is having a dispute notification system, so that you can integrate chargeback alerts with your account management system.
If you’re proactive in disputing illegitimate chargebacks, you’ll find that a large number of disputes are resolved in your favor – and fraudsters will not try again, as they tend to prey on businesses that don’t have a chargeback strategy in place.