This article is provided by BRC Associate Member and Partner, Chargebacks911

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The new 2021 Chargeback Field Report, published by Chargebacks911, shows the significant impact Covid-19 has had on retail merchants. But many of the trends observed—including a surge in friendly fraud chargebacks—were already underway years before the pandemic. Merchants are having trouble combatting this threat, but groups such as the BRC can serve as an advocate for them and foster communication between all parties.

Throughout 2020, retailers around the world were faced with a dire choice: adapt or shut down. The dramatic impact of the Covid-19 pandemic forced merchants to rethink sales strategies, modify policies to accommodate homebound consumers, and shift focus to other channels, particularly ecommerce.

While the world seems to be returning to a pre-pandemic economy, many merchants still feel uncertain about the coming months. This point of view is reflected in the new 2021 Chargeback Field Report published by Chargebacks911. The report asked merchants in a wide range of industries to offer their impression of the current state of chargebacks. Numerous responses indicated apprehension going forward, but the blame may not totally rest on Covid-induced issues.

Chargebacks Were Already an Escalating Threat

The Covid-19 crisis certainly exacerbated the situation, but respondents had already noted an uptick in criminal fraud and friendly fraud from 2018 onwards. Many merchants are reporting double-digit increases in friendly fraud chargeback rates over the past year; seeing as friendly fraud is often mislabelled as criminal fraud, the actual figure is probably much higher. 

This continues a trend of increasing chargeback activity that goes back over a decade which, of course, cannot all be directly attributed to fallout from Covid-19 – though, the pandemic certainly pushed things along. Respondents who noted a change in chargeback issuances linked directly to Covid-19 indicated an average increase of 25%.

Indirect factors also contributed to the problem. As consumers migrated to card-not-present channels, for example, merchants were encouraged to quickly ramp up their web presence. The emphasis on ecommerce and the rapid scaling of services both increased risk, which in turn led to higher chargeback rates.

Since merchants are unlikely to scale back profitable ecommerce channels, this risk will remain. Even if consumers were to unexpectedly revert back to pre-pandemic shopping behaviour, effects from the virus will likely linger through the rest of the year, at least. This assumes there is no additional lockdowns in the autumn due to new strains of the virus.

The point is, the effects of Covid-19 are only one part of an ongoing problem, which is probably why 54% of respondents in the report retained a pessimistic outlook for the remainder of 2021.

Representment and Friendly Fraud Chargebacks

The impact of friendly fraud is hard to overestimate, and the threat is outpacing retailers’ ability to deal with it: 90% of merchants said that “cardholder abuse of the chargeback process” was a leading concern for their business. At the same time, less than one-third described their current efforts at managing friendly fraud as “effective.”

One problem area seems to be chargeback representment, an important but often misunderstood tactic. The representment process allows merchants to “re-present” invalid claims to the issuer, hopefully leading to a reversal.

Failing to challenge these illegitimate customer disputes will cut into revenues, but it also carries long-term consequences: each chargeback negatively impacts the merchant’s chargeback ratio, leading to even further costs.

But knowing about representment—even practicing it—doesn’t mean merchants are having success with it. The Chargeback Field Report found that merchants attempt representment in 43% of cases. However, their net win rate (representments accepted by the issuer that do not escalate to pre-arbitration) stands at just 12%.

Chargebacks911 internal data suggests that by 2023, approximately 61% of all chargebacks filed will be the product of friendly fraud. Unfortunately, merchants seldom have the tools and experience needed to drill down, identify chargebacks by their authentic sources, and successfully fight back on their own.

Retailers Have Options

That doesn’t mean merchants are powerless. Standard verification tools—Address Verification Service (AVS), 3-D Secure 2.0 technology, and geolocation, among others—can help, as can third-party solutions such as chargeback alerts and/or automated network inquiry programmes offered through Visa and Mastercard. The Field Report found that merchants who used alerts saw a 19% drop in chargebacks, while those using network inquiries reported another 17% reduction.

Other merchant-focused actions can also help with prevention. Merchants should analyse policies and procedures for potential chargeback triggers, as well as adopt best practices to optimise the customer experience.

Still, merchants who choose to combat their own chargebacks are fighting an uphill battle, with statistically small returns. By exploiting loopholes in the chargeback system, consumers have turned retailers into victims. The result: friendly fraud goes unchecked, and retailers lose billions of dollars each year through a system originally designed as consumer protection.

More Insight and Greater Collaboration Are Needed

Merchants’ thoughts on chargeback policies often do not align with those of financial institutions, card schemes, and government mandates. Legislation may help, but the wrong legislation could compound the problem. If the situation is to improve, we need greater collaboration between all stakeholders.

By facilitating communication between all parties, groups such as the BRC play a huge role in fostering a better understanding of the retailer’s position. As an advocate and conduit for giving retailers a voice, the BRC can use its influence to help build a better environment for everyone.

The experiences endured through Covid-19 are unprecedented; that doesn’t negate the fact that underlying issues in the payments space predated the pandemic. As we try to work our way back to “normal,” we should take this as an opportunity to examine chargeback protocols, and begin the process of transforming them.