The Surprising Cause of Chargebacks and How to Beat Them

As business leaders continue to weather tough economic times, they’re looking at every line item to see where they can cut costs and reduce leaky revenue. For eCommerce merchants and fintech companies, one particularly frustrating source of revenue loss comes from chargebacks, which are increasing and notoriously complex to resolve.

Chargebacks across the Sift network rose 35% in Q3 2022 versus Q1 2022. Along with digital goods and services and retail, fintech accounted for the third-highest number of disputes from January to September 2022.

From peer-to-peer payment services to digital wallets and the fiat purchase of alternative payment methods like crypto, the cost of chargebacks can have a significant impact on businesses' bottom lines. As key cogs in the flow of money, many fintech companies like payment service providers and crypto exchanges are especially struggling with this issue.

The surprising source and exponential cost of chargebacks 

Overall, chargebacks are costing businesses more every year. Last year, the average disputed dollar amount increased 16% to $192.53. So what’s causing this upward trajectory? Surprisingly, not all chargebacks are due to true fraud and legitimate everyday cardholders are increasingly the biggest offenders.

Last year, nearly 75% of disputes labeled fraud were initiated by the cardholder — many without a valid reason. In fact, nearly one in every four consumers who have filed a dispute say they've participated in friendly fraud — which is when a consumer files a chargeback despite receiving a satisfactory, unfaulty product or service.

This complicates the chargeback landscape even more, making it more difficult for businesses to know when a customer was genuinely scammed or is looking for a way to make quick money in an uncertain economy.

What’s more, the cost of a chargeback goes beyond the disputed amount and can have exponential effects on a business. An often unrecognized impact of chargebacks is customer loyalty. Many businesses don’t realize how much chargebacks can break the trust they’ve built with their customers — 83% of whom say they’d be less willing to buy a product or service from a company if they had to file a dispute due to a fraudulent purchase on their account. 35% of customers went so far as to state that they’d never use that brand again. 

How to respond to the surge in chargebacks 

While businesses grapple with the rise in fraudulent chargebacks not only due to professional cybercriminals but also average consumers committing friendly fraud, they lack the infrastructure and solutions to accurately assess them.

Companies must improve their end-to-end dispute management process, ideally by implementing machine learning and intelligent automation.

By pairing machine learning algorithms with vast amounts of relevant data, thousands of different signals can be analyzed to determine the level of risk for any given transaction. This approach not only saves fraud teams’ time but also enables businesses to minimize illegitimate chargebacks.

And if recovering revenue isn’t enough reason to put a solution in place, some financial service providers are now introducing new rules to prevent the rolling effects of chargebacks from impacting them.

For instance, this April, Visa is updating its evidence rules that will standardize what data companies should submit to establish a pattern of prior, legitimate transaction history to help prove the cardholder made the purchase. This change will shift some of the liability away from companies to help improve their chargeback defenses.

Ultimately, companies should employ a holistic approach to defending against friendly fraud, and that starts by addressing fraud throughout the user journey – from account creation to the final transaction. Through this strategy, companies can better detect the fraudulent signals that lead to chargeback abuse. Reducing disputes can’t be achieved in a vacuum, but by having the right technology and processes in place companies can significantly minimize the loss of revenue from illegitimate disputes.