Chargebacks. The word alone makes many retailers cringe. And for good reason – chargeback rates are rising, with 65% of merchants reporting an increase between 2019 and 2022. That’s a lot of reversed transactions and lost revenue.
But chargebacks aren’t all created equal. There’s a big difference between customers rightfully disputing a transaction and outright abusing the system for personal gain. On one hand, you have friendly fraud – when a customer deceives to get their purchase for free. They fabricate reasons to trigger a reversal and essentially steal from merchants. On the other hand, you have legitimate disputes from dissatisfied customers with valid complaints.
By studying the difference between the two, merchants gain knowledge to combat fraud and effectively manage disputes. This allows them to increase profits, lower fees, and boost their reputation.
What is a Chargeback?
So, what is a chargeback? In simple terms, a chargeback occurs when a credit card payment gets reversed by a consumer. This means that the funds get removed from the merchant and go back to the customer. Chargebacks can occur for several reasons:
- The customer doesn’t recognize the charge on their statement. This could be a case of forgetting the purchase, fraud, or the merchant having an unfamiliar business name.
- The customer claims they didn’t receive what they paid for, like getting damaged goods or incorrect items.
- There’s a dispute over purchase details. For example, differing amounts or transaction dates between the customer and merchant.
- Buyer’s remorse strikes. The fickle customer changed their mind so they disputed the charge.
In any scenario, the credit card company swiftly refunds the money to the customer when a chargeback occurs – withdrawing it directly from the merchant’s account. For customers, chargebacks provide important protection and recourse. For merchants though, they can deliver a financial hit and harm brand reputation.
In addition, chargebacks can happen up to 6 months after a purchase, and in recent years, their usage has risen since more customers are aware that this is a service available to them. This leads us to the core focus: understanding the difference between “friendly fraud” and legitimate disputes when chargebacks arise. Let’s break it down.
Friendly Fraud vs Legitimate Disputes
Friendly fraud refers to illegitimate chargebacks made by deceitful customers to get items for free. They fabricate reasons to trigger a refund, even though there was nothing actually wrong with their purchase. This amounts to outright theft through exploiting the system.
On the flip side, legitimate disputes stem from real problems customers experience with an order. As mentioned earlier, this could be receiving damaged products, incorrect items, or being billed the wrong amount. When valid issues like these occur, it’s reasonable for a customer to dispute the charge to get their money back.
The core difference comes down to validity. Friendly fraud chargebacks are fabricated by customers for personal gain. Legitimate dispute chargebacks have merit due to a real problem with the purchase.
Being able to distinguish between the two is critical for merchants. It enables you to identify bogus-friendly fraud claims while also promptly addressing legitimate issues to maintain customer satisfaction.
5 Red Flags of Friendly Fraud
Friendly fraudsters rely on deception and exploitation. But their misleading tactics often leave behind telltale signs. Here are five red flags for merchants to watch out for:
Multiple Orders to the Same Address
Fraudsters will often test stolen card numbers by making multiple small purchases shipped to a single address. The fraudster uses the address to intercept the goods and see if the charges go through. Watch for a flurry of orders from different cards but the same recipient. This highly suggests coordinated friendly fraud rather than legitimate individual purchases. Carefully track shipments to repetitive addresses to identify potential fraud patterns.
Orders with Expedited Shipping
When a customer urgently requests fast shipping such as overnight or same-day delivery, it may indicate an attempt to obtain goods quickly before the stolen card is reported. Fraudsters know the shorter the turnaround, the higher the chances of success. Legitimate customers are less likely to insist on rushed shipping at premium costs for regular purchases. Scrutinize orders demanding immediate shipping that also display other red flag behaviors.
High-Risk Products
Small, expensive items like electronics, jewelry, gift cards, or digital goods tend to be targeted more by friendly fraud given their high resale value. Fraudsters know these in-demand products can easily be resold at a profit. Be especially wary of large quantities of risky products, particularly when combined with other suspicious indicators. Have strict review procedures for high-risk categories.
Irregular Shopping Patterns
Look for orders that seem out of character for the customer, like dramatically larger purchase amounts or different product categories than normal. Fraudsters often don’t have enough details to mimic a customer’s typical shopping habits. The discrepancies in past behavior are a clue the purchase may not be legitimate. Rigorously analyze transaction histories to detect abnormal spikes or shifts away from regular purchase patterns.
Multiple Failed Payments
If you see multiple declined authorization attempts on the same card number, it likely means the real cardholder reported fraud, and their card was blocked. A fraudster may persist trying different products to see if a charge goes through. But once a card is flagged, even initial payments won’t succeed. Multiple failures in a short timeframe strongly indicate stolen payment details being tested. Have processes to quickly identify and halt repeat failed charges.
Final Word
The bottom line – looking out for those sneaky red flags can help merchants stop fraudsters in their tracks. When you know the signs to watch for, you can catch bogus disputes and protect your hard-earned money.
By understanding what makes a chargeback legit versus friendly fraud, merchants gain the power to manage disputes properly. That’s the key to keeping more revenue, lowering fees, and keeping customers happy.
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