3 Categories of Chargebacks
Chargebacks are usually one of the main concerns for clients who accept card not present (CNP) payments, however did you know that not all chargebacks are created equal? Each of following categories of chargebacks have different circumstances and thus different consequences because banks will handle them differently.
Criminal Fraud
Criminal Fraud is an umbrella term covering any unauthorized transaction made with stolen or breached payment card information. This sort of activity has increased on a global scale since the rise of electronic transactions. It is easy to underestimate the total detrimental effects this can have on a business.
One positive is that criminal fraud chargebacks are generally less ambiguous and easier to spot than other disputes, which makes preventing them a more straight-forward process. Once you identify the extent of the problem, you can begin developing a strategy using different tools available to merchants. These tools include card network verification tools, fraud scoring, internal manual review processes, and detection processes.
Many disputes originally identified as criminal fraud end up being cases of friendly fraud (which is covered below). However, you must first eliminate the possibility of criminal activity.
2. Merchant Error
Merchant error refers to any number of minor mistakes or missteps that end up resulting in a chargeback. These can come in the form of unclear policies, shipping or software errors, or simple oversights. The good news is that these types of chargebacks are preventable. To do this a merchant must first identify what errors are occurring throughout the process. This requires an in-depth analysis of the business from end to end.
Some merchants have a hard performing this unbiased analysis on their own business. This happens because they are too intertwined in their own business and can’t see the forest through the trees. Being too close to the business can blind you to missteps an unbiased observer could spot. Assistance from a third-party expert can help a merchant discover what problems could be leading to an increase in chargebacks.
3. Friendly Fraud
After you have eliminated criminal fraud and merchant error as the culprits of a chargeback, it likely means that friendly fraud is one to blame. Friendly fraud is a harder challenge to tackle. This type of fraud occurs after the transaction, which makes anticipating or mitigating the threat harder to accomplish. This mostly occurs within the online retail industry.
One of the best options for online retailers is to challenge the chargeback through representment. If a merchant is confident that the chargeback is friendly fraud, then they can expect a large amount of chargeback reversals. This will recover lost revenue and help improve the merchant’s reputation with the bank.
In addition to challenging the chargebacks, a merchant can also use chargeback alert networks to help avoid them in the first place. These networks send notifications of incoming chargebacks, which allow a merchant to either refund the transaction, or provide additional information to help resolve the issue.