Why Disputes and Chargebacks are Increasing Due to Covid-19—and What Merchants Can Do About It
Covid-19 has caused many to adopt new habits—for consumers, this has meant a push to more online shopping. The shift towards more card-not-present (CNP) transactions also brings more risk for merchants, as CNP purchases are at higher risk for dispute compared to their in-store card-present counterparts.
While travel and leisure companies such as cruise lines, airlines and hotels saw a spike in payment disputes early in the crisis, many other industries are also experiencing an uptick in chargebacks. In fact, some merchants have seen their chargeback ratio soar as high as 30% in recent months, according to Mastercard data.
Chargebacks can be a nuisance for businesses but are a crucial part of the payments lifecycle to protect consumers. We’ve put together some key information and tips below to help merchants handle disputes during this time to protect both the customer experience and their bottom line.
How Covid-19 is Driving Up Chargebacks
A few converging trends are fueling the recent rise in chargebacks:
- Rise in cybercrime. Ecommerce was already booming before the pandemic began, but it’s skyrocketed in its wake. This has led to a surge in card-not-present (CNP) fraud. There have been hundreds of new cyberattack schemes introduced every day as fraudsters increasingly move online. According to NuData Security, there’s been a 679% increase in the creation of suspicious accounts.
- Transaction Confusion. With more transactions happening online, there’s an increased chance of transaction confusion. Also known as friendly fraud, cardholders may end disputing legitimate transactions simply because they don’t recognize them on their statement.
- Widespread cancellations of events and travel. Cancellations of events and travel and sweeping business closures have caused many consumers to dispute payments with their issuer in order to get their money back when the merchant doesn’t automatically provide a refund. Just one example: One of Europe’s low-cost airlines experienced a 300% increase in its chargeback volume in March 2020—as the pandemic was starting to cause many travel bans and lockdowns—and an additional 100% increase in April. Typically, only 20% of its chargebacks are non-fraud-related, but that portion rose to over 70% in March and April. “I think a lot of people started to move toward their banks to get a refund in the early days,” the airline’s revenue protection manager said in a recent Ethoca webinar. He predicts there will be a prolonged wave of chargebacks in the travel industry as reservations pick up again yet consumers remain less confident about their travel plans.
While some of these trends, such as event cancellations, will surely decrease in coming months, others—such as the financial strain put on consumers by the economy—aren’t likely to disappear quickly.
Even before the pandemic, the value of international chargebacks was expected to rise to $35 billion in 2021, according to Aite Group. With the acceleration of ecommerce, we can expect that chargebacks won’t be going away in the foreseeable future, unless merchants help take steps to handle them.
Why Chargebacks are so Costly to Merchants
The recent increase in chargebacks shouldn’t be taken lightly, because chargebacks present a significant cost. For one, merchants lose the transaction value for each dispute—even if they already sent out the goods or services. Beyond that, the merchant generally must pay a chargeback fee that can range anywhere from $5 to $50 per chargeback.
Moreover, the full chargeback process is lengthy—lasting up to 120 days—and if the merchant wants to dispute the chargeback, they must invest the time to gather and submit compelling evidence that shows the customer’s purchase is legitimate and write a chargeback rebuttal letter.
How Merchants Can Better Manage Chargebacks During Covid-19
Adopting some best practices and deploying the right tools can help you greatly reduce chargebacks in the current environment, as well as in the months and years ahead. Here are three key strategies to consider:
- Create customer-friendly policies. By offering your customers transparent and fair return, exchange and refund policies, you not only foster goodwill and loyalty, but also encourage them to come to you with any problems—reducing the odds they’ll simply dispute the charge with their card issuer directly, triggering a chargeback. To further encourage customers to reach out to you directly, make sure your contact information is readily available on your website or even included as part of your merchant descriptor if possible.
- Find out sooner when card disputes are made. Merchants don’t often find out about a dispute until it’s too late to do anything about it. Using a collaborative tool allows merchants to learn of disputes as soon as they are initiated, directly from issuers. This allows merchants to stop an order or take other corrective actions to resolve the dispute promptly—ultimately preventing the chargeback, the chargebacks fees and other potential lost revenue.
- Provide detailed transaction information. Card disputes often happen because a customer doesn’t recognize a charge on their card statement. By providing your customers with detailed transaction information, including the exact time and date of purchase and the geographic location of the device the purchase was made on, you can help them identify it and reduce the odds “friendly fraud” will occur.
Collaborative tools make it easy to provide your customers and issuers’ call center employees with such detailed transaction information. In fact, one Ethoca analysis found that arming issuers’ call center employees with transaction details from the merchant avoided disputes from turning into chargebacks about 60% of the time.
During these times of uncertainty and given the expected long-term rise in chargebacks, merchants shouldn’t take the threat of chargebacks lightly. The best defense? Preventing them before they happen.