Chargeback protects the consumer from unauthorized, erroneously charged or unauthorized payment. This is a complaint process in which the consumer asks the bank for a refund for a good or service with which something was wrong. This form of consumer protection was introduced in the 1980s so that the victim of a payment card theft does not have to bear the financial consequences of possible misuse.
The consumer can request a chargeback only if he paid for the goods with a debit or credit card. The bank does not need the merchant's consent - if it complies with the consumer's request, it will automatically deduct the money from the merchant and credit it to the customer's account. The disadvantage is that the merchant does not have the opportunity to communicate with the consumer, and the claimed goods will not be returned to him either. In most cases, he also has to pay additional fees. Oh...
Chargebacks are initiated by cardholders, evaluated by banks and paid by merchants. This process can take months and sometimes even years. Assessing chargebacks is not entirely straightforward and not always fair. The primary goal of introducing chargeback was and is consumer protection.
Beware of scams
Retail is losing over 4% of sales every year due to chargebacks. What are the most common reasons for requesting a chargeback?
1. Eligible applications
They provide customers with a quick and easy way to report fraudulent transactions on their card statement. This is a legitimate protection for the consumer in the event of a technical error, which can be an unauthorized payment, theft, repeated withdrawals and many others.
2. "Friendly fraud", loosely translated as friendly fraud
The customer can also request a refund for other reasons. If there was no technical error and the customer requests a refund, we refer to these cases as "friendly fraud" because they contradict the basic principles of refunds. Here are some examples that can be categorized as a friendly scam:
Avoiding the classic complaint process. The customer considers the chargeback to be less complicated and decides that he does not want to go through the whole process of complaining and arguing with the merchant.
Delivery problem. The goods were not delivered in due time, they arrived damaged or other goods.
Price/quality problem. The customer does not like the quality of the product, it seems overpriced, or he unknowingly bought a "fake".
The customer cannot identify the payment. It may happen that he can't recognize the name of the company during the statement or he simply forgot that he bought the goods.
3. Intentional fraud
Chargeback also gives room for intentional fraud. However, it is difficult to distinguish them from the "friendly" ones. The customer may insist that the goods arrived damaged or could not identify the name of the selling company. Proving the truth is even more complicated.
Can the merchant defend himself in the case of a suspicious chargeback request?
If the merchant suspects that this is an unauthorized consumer request, it certainly makes sense to contact the contractual bank. All data and evidence that questions the credibility of the consumer's claim must be prepared. In the case of reverse payments, there is no communication between the merchant and the consumer, all communication is covered by their banks. However, the trader often gets the short end of the stick. Ultimately, the arbiter is the card issuer and they have their own rules that all interested parties agreed to when signing the terms and conditions.
Do not confuse chargeback and refund
Chargebacks and refunds work on a similar principle, but there are important differences between them. For the merchant, refunds are a more acceptable method of complaint, since communication does not take place through banks, but directly between him and the consumer. Thus, they can explain any misunderstandings. Refunds may be partial and no additional fees apply. In the case of a refund, it is also an advantage that the claimed goods are returned to the merchant.
Interesting facts in numbers
In 2021, more than 600 million chargebacks were processed globally
In 2022, the global value of chargebacks will exceed €95 billion
According to statistics, it is expected to increase even to more than €110 billion in 2023
Only 14% of refund applicants contact the merchant first
A consumer who has already requested a refund is up to 9 times more likely to request it in the future
Up to 75% of refund requests are so-called "friendly fraud"
50% of them start as a misunderstanding and are unintentional
The number of "friendly fraud" cases increased by 79% between 2018 and 2021
Approximately 40% of consumers who committed "friendly fraud" repeat it within 60 days
Finally, a few recommendations
Use a reliable POS system and payment gateway, they will provide you with protection and prevent a large number of frauds. Also, have an active help desk and a pro-client approach, make sure that the customer can contact you at any time. I will elaborate
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