The pandemic thrust the world into a state of disruption, resulting in a noticeable shift in consumer behavior towards eCommerce and digital transactions. One of the more worrying trends is a surge in friendly fraud and an overall spike in chargebacks.
But, was this uptick in chargebacks really a dramatic shift, or is it just an outlier in a preexisting trend? According to the 2021 Chargeback Field Report recently published by Chargebacks911, it may be a bit of both.
The report surveyed merchants across numerous different verticals and sizes. This helped form a diverse pool in which to identify relevant statistics in the areas of chargebacks, disputes, and fraud.
The information obtained can be used as an important tool to help us understand challenges currently facing merchants. For example, it’s estimated that chargeback issuances increased by 25% due to Covid-19 among participating merchants. In contrast, the average chargeback recovery rate sat at just 12%.
What are these numbers telling us? First of all, this is a problem that won’t just go away on its own or be solved overnight. Secondly, it’s important we understand that the issue doesn’t only affect merchants. Parties on all sides of the transaction—financial institutions included—must do their part to understand the situation, fight back against fraud, and ensure the proper tools are utilized.
Far Reaching Consequences of the Pandemic
Of those merchants surveyed, almost 80% admitted to being victims of friendly fraud over the last three years. 68% stated that the pandemic was directly responsible for this growth in chargeback rates.
An illustration of this is the food and beverage industry, which was one of the hardest-hit verticals. Though they once boasted the lowest chargeback rates, the rapid shift to eCommerce during the height of the pandemic led to unexpected fraud attacks. With the emergence of new order, delivery, and payment options, fraudsters had more opportunities to take advantage of the system.
Despite the fact that 94% of merchants now view friendly fraud as a problem, fewer than three in ten are successfully addressing the problem. As highlighted in the report, this reluctance to act speaks to a knowledge gap. The end result is that merchants do not feel confident in their ability to fight fraudulent chargebacks.
Unfortunately, few merchants are able to successfully distinguish between friendly fraud attempts and genuine claims. We see that a lack of knowledge and understanding on the part of the merchant is causing alarming consequences, and will continue to spin out of control if left unchecked.
The impact of this will extend beyond individual merchants. The average acquirer loses $26 per chargeback due to processing fees and card network fees. Other sources of loss, such as issuer write-offs for low value transactions, mean that financial institutions will lose nearly $4 billion a year to chargebacks by 2023, according to our projections.
Where Do We Go from Here?
The answer to fighting this new wave of illegitimate chargebacks on the merchant end might be to outsource to a third-party specialist. This is a prime opportunity to free up additional revenue which is currently going unleveraged in most cases.
Merchants cited a lower chargeback rate and increased revenue as the top benefits of working with a third-party to manage their chargeback responses. However, despite these positive results, only two in ten merchants are fully outsourcing their chargeback management to a third-party company.
One of the most important things that financial institutions can do to help is to educate merchants on how to deal with the pressure of an economic climate in fragile recovery. They need to ensure that merchants understand the chargeback process. They must also familiarize merchants with the devastating consequences of writing off friendly fraud as a “cost of doing business,” and the reserve of value merchants can unlock by eliminating friendly fraud.
Startling statistics from the report show that, for every friendly fraud case that goes uncontested, 50% of the cardholders will commit the same crime again within 60 days. This is a problem that merchants can’t afford to ignore.
Are you a representative of a financial institution looking for ways to offer greater value to customers? Click here to view the full 2021 Chargeback Field Report for free, and see what you can do to help merchants protect their revenue and sustain their businesses.