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Online Fraud: What is a Chargeback and How to Fight It

As ecommerce becomes the shopping channel of choice for a growing number of consumers across the world, the risk of online fraud for businesses has been on the rise. In this post, we discuss the impact of illegitimate chargebacks on businesses and how THG Ingenuity can help.

September 16, 2022

4 min read

Celeste Rivas

With more and more consumers choosing to shop online across the world, ecommerce is expected to continue growing steadily in the coming years and is projected to make up around a quarter of all global retail sales by 2025. 

Whilst brands welcome this increased volume of transactions on their sites, this rise in online operations has also translated into greater pressure for businesses to ensure they have an effective fraud detection strategy in place to avoid negative financial impact.

With 46% of organizations saying they have experienced fraud or other economic crimes, businesses are realising that they are increasingly exposed to malicious actors and are at risk of potential losses from fraudulent activities.

Chargebacks can be an example of these illegitimate actions and can mean lengthy disputes with banks and a serious impact on both revenue and reputation for merchants. 
 

What is a chargeback?

A chargeback occurs when the cardholder goes directly to their bank to query a charge they do not recognise from a merchant. Rather than contacting the business for a refund, the cardholder contacts their bank and requests their money back.

While the request may be legitimate or even accidental (for example, when the customer doesn’t remember making a purchase), there are occasions when chargebacks are a way for customers to get their money back without a legitimate reason (for instance, they regret their purchase or want to keep the product and their money).

When a chargeback request is triggered, funds are immediately removed from the merchant’s account and temporarily reimbursed to the consumer.

If the business chooses to contest the dispute, the merchant then needs to participate in a lengthy series of defined steps created by the card associations with the issuing and acquiring banks.

How do chargebacks work?

If a customer raises a query of a purchase with their bank, the acquiring bank will remove the funds from the merchant’s account and reimburse the cardholder with a temporary credit on their account.

If the merchant chooses to fight the chargeback but loses, they will have to pay administration fees to fight the charge, plus the value of the original product and any shipping costs.  

Conversely, if the bank rules that the evidence provided by the merchant has successfully refuted the chargeback, the bank will return the funds to the merchant’s account as a permanent credit, and the cardholder will see a charge for the original transaction posted again on their account.

Why is it important to reduce chargebacks?

Chargebacks can be a complex and expensive problem to solve, and numerous merchants make mistakes when it comes to fighting chargebacks. Resolving a chargeback dispute can be lengthy, so it is vital for ecommerce businesses to know their chargeback rights as merchants. 

A low chargeback rate is a key indicator of the strength of your ecommerce fraud prevention strategy and whether it’s able to detect fraudulent checkout activity and distinguish legitimate transactions from illegitimate ones.

On the contrary, a high chargeback rate has negative consequences for both the revenue generated by your site and your customer’s lifetime value.  

Another reason it is crucial to reduce chargebacks is to avoid being placed in dispute monitoring programs set by credit card companies like Visa and Mastercard.

If a merchant exceeds the monthly threshold of a 0.9% chargeback ratio or 100 chargebacks, they will be granted a four-month window by the card schemes to bring their chargebacks under control.  

However, if the merchant’s monthly chargeback ratio increases to 1.8% or the number of monthly chargebacks amount to 1,000, the business will be assigned a high-risk merchant category code.

The merchant would then be subject to paying punitive fees, having costly periodic reviews and being potentially banned from accepting Mastercard and Visa cards entirely, which could have very serious consequences for the business. 

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How do you prevent chargebacks?

Ensuring your ecommerce platform is covered by a fraud prevention solution plays a fundamental part in any successful web experience.

A robust fraud tool will enhance a smooth and seamless online experience and help maintain positive relationships with banks and payment processors while giving you the peace of mind that your brand and business are being protected. 

THG Ingenuity's proprietary fraud management solution was specifically designed to help ecommerce businesses boost revenue, increase customer retention and protect your brand and its reputation against fraud.

It utilizes bespoke machine learning models, device intelligence and a global database to catch known fraudsters and protect your ecommerce business from fraudulent disputes.

To discover how THG Ingenuity can support your fraud detection needs, get in touch today.

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