3 Types of Chargebacks Merchants and Issuers Need to Prevent
The global chargeback volume has been climbing, creating a costly problem for both issuers and merchants. Not only do merchants and issuers pay the high costs associated with disputes and chargebacks, but they also risk compromising their brand experience and reputation when customers feel the need to dispute purchases. The best defense? Understand the different types of chargebacks and why they happen and then take steps to prevent them.
Here are the three common types of chargebacks merchants and issuers should be ready for and how to prevent them:
1. True fraud
True fraud—also called third-party fraud—is when a person other than the cardholder (whether someone they know or a stranger) purposely steals their identity or card credentials and makes purchases. The fraudster may have gleaned those credentials through various means, whether a cyber breach or email phishing scam, payment card “skimming” at a gas station, or stealing someone’s card directly from their wallet.
When the cardholder spots the unrecognizable charge they identify as fraud on their transaction statement, they will generally contact their issuer immediately and dispute the charge—leading to a chargeback. The issuer will then need to cancel the card and issue a new one.
How to prevent this type of chargeback: It’s critical to catch true fraud as quickly as possible to stop its immense costs to both issuers and merchants. Collaborative solutions that allow issuers to provide merchants with fast and accurate alerts when customers dispute purchases, can help prevent those disputes from becoming chargebacks and allow merchants to stop orders and shipments—reducing the other costs involved with fraud.
2. First-party fraud
When cardholders dispute transactions for purchases they’ve knowingly made, this is called “first-party fraud.” Such disputes happen for various reasons, but increasingly they happen due to dissatisfaction with the merchant experience or a problem with the purchase—such as an order arriving late or damaged. These types of disputes can also happen due to sheer buyer’s remorse.
First-party fraud can be frustrating to merchants and issuers because it often leads to chargebacks that could have been avoided had the cardholder contacted the merchant directly and sought a refund or exchange.
How to prevent this type of chargeback: Sharing information faster between issuers and merchants is critical to preventing first-party fraud. Collaborative alert tools give merchants the opportunity to find out about disputes in real-time. It allows merchants to speed up the process of providing evidence supporting that the transaction is a legitimate purchase. Alerts allows them to take steps to remedy the issue that caused the dispute before it turns into a costly chargeback.
3. Transaction confusion
Cardholders also dispute legitimate charges due to confusion while reviewing their transaction statement. Transaction descriptions can often include an unfamiliar or unrecognizable merchant name—and with people buying so many different things from various vendors or they may simply forget about a purchase they made.
Transaction confusion that leads someone to dispute a legitimate purchase is often called “friendly fraud.” These kinds of chargebacks could be fully avoided had the customer simply recognized the merchant’s name on their transaction statement, helping them recall the purchase.
How to prevent this type of chargeback: By providing consumers with clear merchant names and logos on their transaction statements, issuers and merchants can avoid the unnecessary expenses associated with chargebacks due to transaction confusion—which is increasingly becoming more common. Collaborative tools that allow merchants to provide their customers with clear purchase details—such as their name and logo, as well as a digital receipt that breaks down what was purchased—right through the digital bank apps they use every day can be a huge help.
Chargeback prevention through partnership
Ethoca offers collaborative solutions—including Ethoca Alerts and Ethoca Consumer Clarity—that allow issuers and merchants to rapidly and easily work together to prevent the various types of chargebacks.
Whether it’s providing real-time dispute alerts so that merchants can reduce the high costs of fraud and other types of disputes or providing consumers with transaction clarity to prevent disputes in the first place, Ethoca’s solutions can make a big impact.
Are you ready to reduce chargebacks and improve your experience?