How to Overcome the Chargeback Challenge

What Are Chargebacks?

Chargebacks occur when buyers dispute charges to their credit cards, compelling the bank to force a refund. Sometimes a chargeback is an honest mistake, which is often called friendly fraud. This occurs when customers file a chargeback because they forgot about their purchase or don’t recognize the charge on their credit card statement.

Other times, fraudsters will intentionally order a product then file a chargeback to essentially get the product for free. Sometimes they’ll even resell the “free” products. These malicious chargebacks are considered a “double whammy” because the merchant suffers product loss in addition to incurring extra fees and fines associated with the chargeback complaint. The penalties for chargebacks range from around $15 to $115, which can add up quickly. Plus, if companies happen to exceed a defined chargeback threshold, they could be entered into an Excessive Chargeback Program, which costs them additional fees until they get their chargeback rate under control.

Chargebacks: A Ubiquitous Problem

A 2020 study we published with our anti-fraud partner Kount, an Equifax company, revealed chargebacks topped the list of fraud types threatening ecommerce merchants around the world. The poll results were also consistent with the type of fraud we see from our merchants.  

Chargeback Red Flags

Merchants must consistently examine their transaction data and historical chargebacks to get ahead of this prevalent issue. Look out for these chargeback warning signs:

• Abnormally high average order values — If an average order value is 10 or 20 times higher than normal, fraudsters could be trying to score your merchandise in bulk.
• Risky IP addresses — Certain IP addresses have a higher likelihood of being connected with fraud based on location or if users deploy IP masking.
• Conflicting credit card and shipping addresses — An item being shipped to an address different from the credit card’s billing address could indicate a chargeback in the future.
• New email accounts — Sometimes fraudsters will create entirely new emails to complete a fraudulent transaction or abuse your current referral program. More than 35% of subscribers admit to using a second email to receive referral benefits, according to our September 2022 Subscription Commerce Conversion Index.

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Fighting Chargebacks

Stay ahead of malicious chargebacks and friendly fraud with these tools and strategies.

Automated alerts: Sometimes online merchants don’t even find out about chargebacks until a significant amount of time has already passed. The best ecommerce platforms can send an alert in real-time when a chargeback is initiated against online retailers, so they can preemptively reverse it right away.

3D Verify: Adding an additional layer of security at checkout, 3D Verify protects merchants from friendly fraud and reduces chargebacks by shifting the liability back onto the issuing bank. This supports better merchant ID (MID) health and reduces chargebacks on first rebills, when more than 85% of disputes occur.

Preventative security: To ensure all transactions are genuine, an enterprise-grade ecommerce platform should gather and leverage millions of data points using advanced artificial intelligence. Behaviors like cancellations, chargebacks and refunds identify bad actors and the platform stops their sales from processing right at the point of purchase.

Data and dashboards: Leverage order analysis, affiliate monitoring dashboards and fraud statistics to identify chargebacks and opportunities to reduce them. Zoom in to see comprehensive details at the per-customer level or zoom out to get the macro perspective on how chargebacks impact your business. 

Blocking chargebacks while simultaneously creating a seamless checkout experience for legitimate customers is essential for scaling an online business. Don’t let fraudsters or honest customer errors derail your growth.

Learn how sticky.io helps merchants fight chargebacks and friendly fraud. Request a demo today.