As e-commerce sales continue to hit record highs, merchants around the globe are seeing a correlated rise in illegitimate disputes by cardholders through card-not-present (CNP) transactions. This trend is directly affecting the price of goods and services for consumers. Moreover, it has led retailers to adopt stricter policies and AI-driven tools to protect their revenue.
Chargebacks911’s Chargeback Field Report aims to give merchants and financial institutions an understanding into the current state of chargebacks and the measures being taken by businesses to help stem the tide of chargeback abuse.
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Spike in chargeback abuse
One of the most alarming statistics revealed is the spike in increased chargeback abuse. Nearly three quarters of surveyed respondents reported an 18% average increase in friendly fraud over the last three years.
While the chargeback process is a necessary mechanism meant to protect consumers, the misuse and abuse of the system has caused insurmountable reputational and financial damage to merchants.
With 53% of cardholders disputing a transaction with their bank without contacting the retailer, merchants lose the ability to resolve disputes directly with the consumer.
“In the US, the right to dispute transactions is protected by federal law. Unfortunately, our survey results suggest that the majority of customer disputes are actually illegitimate,” said Monica Eaton, CEO of Chargebacks911.
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By GlobalDataUp to 70% of credit card fraud based on chargeback misuse
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“In fact, major card networks estimate that as much as 70% of all credit card fraud can be traced to chargeback misuse, or ‘friendly fraud’. This is an issue that surveyed merchants say has increased nearly 20% over the last three years.”
With chargebacks now easier than ever to file with an issuing bank, Mastercard reports that money lost to chargebacks cost merchants an estimated $117.47bn in 2023.
Ongoing issue of merchant errors
What’s more concerning is that merchant errors remain a leading cause of customer disputes. For example, confusing or unrecognisable billing descriptors was the leading cause of chargebacks among cardholders surveyed in Chargebacks911’s 2024 Cardholder Dispute Index.
A third of merchants, however, said they did not know exactly how their billing descriptor appears on customer billing statements.
While suspected fraud is certainly a valid reason to file a dispute with their issuer, the main motivation for cardholders to seek resolution with their bank rather than the merchant was a matter of convenience, according to the Field Report, with nearly half of respondents claiming that the speed of resolution was the primary factor for filing a chargeback.
Retailers must now compete with cardholders’ banks as to which can be more accommodating. Chargebacks911 says the best response for merchants to address this trend is to prevent and confront through systems like chargeback alert programmes and the representment process.
Of the most useful tools being utilised to address post transaction fraud and misuse, merchants are leaning heavily on machine-learning and AI to aggregate, analyse and act on transaction data.
Increasing use of AI and ML to target friendly fraud
In fact, 62% of surveyed retailers said they are already using or plan to use AI-based technology to identify and address instances of friendly fraud.
“Chargeback data can serve as a powerful KPI, useful for both more accurate decisioning and fine-tuning strategies,” said Eaton. “It’s worth pointing out that according to our survey, merchants who used a third-party solution or software were twice as likely to know their tracking numbers.”
Furthermore, card networks themselves are more aware of the impacts friendly fraud is having on merchants, and have rolled out new dispute rules to help create a more balanced framework when it comes to chargebacks. Updated rule sets like Visa’s Compelling Evidence 3.0 and Mastercard’s First-Party Trust Program help businesses protect honest transactions and prevent illegitimate disputes by allowing for more transaction information to be submitted by retailers, including purchase history and IP addresses.
Merchants of all sizes are encouraged to challenge any chargeback they receive that shows signs of friendly fraud or first-party misuse, according to Chargebacks911. The majority of surveyed retailers say they have an internal team dedicated to managing chargebacks, but when comparing the numbers reported by merchants, the report found that companies who leverage representment software and services through a platform provider saw a net recovery rate more than 55% higher than merchants that managed the process internally.
