Chargeback Fraud Hampers E-Commerce

Sep 14, 2016

"363x277Monica-Eaton-Cardone-"Organized retail crime (ORC) causes about $30 billion worth of losses each year.  An overwhelming majority retailers — 97 percent — responding to the National Retail Federation’s (NRF) 11th annual Organized Retail Crime Survey said they have been victims of ORC within the past year.

Headlines point toward the rise of cyber criminals and sophisticated criminal gangs ‘stealing to order’. Yet, while these are serious threats to the well-being of merchants in the United States, including sports retailers, more insidious types of criminal activity can also erode hard-won profits. The phenomenal growth of chargebacks is one such example.

LexisNexis’ 2016 True Cost of Fraud Study revealed that chargebacks are costing retailers $3.16 in chargebacks for every dollar fraudulently lost — 216 percent higher than the initial loss. Overall, chargebacks account for 42 percent of total fraud losses suffered by large and small companies, including a 9 percent year-on-year rise for the online channel and 12 percent for the mobile channel, according to LexisNexis.

Not Just a Fact of Life
While other types of fraud and theft tend to dominate the limelight, chargeback fraud is a quietly growing trend. So far, many retailers have, however reluctantly, decided to tolerate it. I was a merchant and know firsthand the irritation and impact chargebacks have on a business, and they should not be accepted as just another fact of a retailer’s life.

What exactly is chargeback fraud? It is a process initiated by customers to reclaim funds they did not authorize to leave their account, or recompense for goods that did not arrive, were damaged or were not as advertised.

The cardholder’s bank will generally credit the complaintant’s account when the chargeback process is initiated. In some instances, the cardholder is an honest customer who is making a genuine claim, but in others, the chargeback is processed with criminal intent.

A common example would be a customer buying a soccer jersey, then claiming he did not receive it. The cardholder then contacts the bank to instigate a chargeback rather than contacting the seller for a refund. This is bad news for online retailers because chargebacks would not only cost them the sale price, but also the cost of the goods supplied.

A staggering 86 percent of chargebacks are fraudulent, and many consumers with legitimate concerns often bypass the sellers to file complaints directly with their banks. This generally is a learned behavior, as most customers do not intentionally attempt to get something for free the first time there is a dispute. However, once they profit from a chargeback, many are tempted to repeat the process fraudulently. Within our industry this has become known as “friendly fraud.”

The problem is that the more fraud perpetrated by consumers, the more businesses need to raise prices to compensate for these losses. It can be a perpetual cycle where everyone loses, including genuine customers. You may conclude that the time to fight a chargeback against a $20 licensed football does not make commercial sense, and so the loss has to be written off. However, as a sports retailer, the market is extremely competitive and margins can be tight. So what can be done?

How to Tackle Chargebacks
1. Improved Customer Service: Honest customers may contact you directly about an issue with their order. If your staff does not show concern and present a solution to the issue, the customer will look for a resolution elsewhere, including via a chargeback. So a customer service policy that staff have been trained in and is presented clearly on marketing materials are two steps that can be acted upon quickly.

2. Be Responsive: Make sure that any customer issue is dealt with promptly. If a complaint is made outside working hours, clearly state on your website or on voicemail when you will respond to the issue. Remember, customers want a fast resolution and many have no hesitation initiating a chargeback if they feel they are being ignored or if it is an exhaustive effort to reach you.

You do not need to accept chargebacks as a normal part of being an online sports retailer. It is possible to take effective action and give your business a healthier profit margin.

Monica Eaton-Cardone is the COO of Chargebacks911, which focuses on chargeback mitigation and risk management for Internet merchants, and CIO of its European parent company, Global Risk Technologies. She is an expert on risk mitigation and chargeback remediation. For more information or to comment on this article, email Monica at