With the economy cratering, and businesses suddenly dependent on online transactions, merchants find themselves battered by customers demanding their money back on past transactions. Whether legitimate or not, chargebacks are on the rise and causing chaos for business owners.
Another unforeseen consequence of the worldwide pandemic is a sharp uptick in fraudulent chargebacks.
With the economy cratering, and businesses suddenly and solely dependent on online transactions, merchants find themselves battered by customers demanding their money back on past credit and debit card transactions.
Sometimes it’s because criminals see an opportunity in chaos. Other times, it’s businesses themselves making errors. And then there are customers trying to scrape some cash together – any way they can.
See related: How can I dispute a credit card chargeback?
Chargebacks are on the rise
According to Monica Eaton-Cardone, founder and co-owner of Chargebacks911, a chargeback management company, “We’re seeing more chargebacks all the time. It’s crazy.”
In the scramble to keep some measure of money coming in, merchants began or amped up online selling in March, often without a clear strategy for monitoring fraud.
“What we’re seeing is a lot of businesses that haven’t had experience [with e-commerce] are getting hit by a lot of fraud, because they’ve had no experience in this environment,” Eaton-Cardone says.
That’s what happened to Nicholas Bacho, owner of The Vapor Shoppe, a chain of nine vaping stores in the greater Detroit area. In the span of a few days, Bacho went from managing employees at multiple retail locations, complemented by a small online operation run out of the company’s warehouse, to an entirely virtual sales environment, handled by him and his brother at the warehouse.
They soon realized it wasn’t enough to simply fill an order – they had to verify it, too. “We look at our fraud analysis that tells us their IP address,” says Bacho. “We look to see if their billing address matches it. We go through a lot. We try to eliminate as much fraud as possible.”
Still, they’ve lost money, at a time when their revenues are already down. Once, they shipped products to someone who used a stolen credit card. When the owner of the actual card demanded his money back, they not only had to fork that over, but a $35 chargeback fee as well.
Another customer ordered merchandise on his card. Everything checked out. Still, he demanded a refund. “I don’t know if it’s the timing or if people can’t afford it,” he said. “That was one of my biggest question marks with all this.”
Actually, there’s a name for what Bacho experienced: friendly fraud. And it’s on the rise.
“You’re online at midnight and you’re thinking, ‘God, when is this going to end?’ And then you start buying to make yourself feel better,” says Beverly Harzog, credit card expert and consumer finance analyst at U.S. News & World Report.
A few weeks later, the bill arrives, and with it, buyer’s remorse.
“We’re in this pandemic and things are happening,” says Joyce Carter, vice president of client services at Member Access Processing. “We’ve seen people do chargebacks saying this never happened, and that never happened. But we can go back and do the history. They want the money back because they need the money.”
Some find it isn’t hard to get it either. Disputing a transaction these days can be as simple as a few clicks on the issuer’s website. That’s because banks prioritize customer satisfaction over merchant finances, says Jeff Sakasegawa, trust and safety architect at Sift, an online fraud protection company.
“Customers must provide very little proof to convince banks or credit card companies to issue a chargeback,” he said.
It’s even harder for merchants to dispute those chargebacks when the purchases were made online, says Thomas French, a financial industry consultant who specializes in fraud at SAS, an analytics and software company. According to French, “the pain for online businesses will be much higher.”
The ease of the process may surprise customers and even prove enticing. “Statistically, we know that if you filed another chargeback this month, even if it was for $15, and it was successful and you didn’t have a consequence … 50% of consumers will do that again in less than 60 days,” says Eaton-Cardone.
Most of the time, the motive isn’t malicious. “They don’t understand it is penalizing the merchant or stealing,” she said. “They literally think this is some kind of insurance from their card company.”
And they may be desperate themselves. “People are not thinking logically,” says Eaton-Cardone. “They are instinctively protecting their own survival.”
So, when that $15 refund comes through, “now they are going through all of their credit card statements for the last 90 days,” she said. Consumers aren’t disputing every item, though. Chargebacks911 has seen a marked increase in disputes over expenses of four figures and higher, according to Eaton-Cardone.
“If you are a consumer and you are going through any bank statements you have, you don’t care about the $100 charges,” she said. “You are looking for the $3,000 charges.”
People come up with all kinds of reasons for requesting a chargeback, says Harzog. “They might say the order has never arrived. Or they did receive it, but the goods are damaged.”
The latter excuse is particularly popular these days among customers searching for cash opportunities in old card statements, says Eaton-Cardone.
“They can’t easily say, ‘Oh, this is fraud, but I didn’t notice it when I paid my bill four months ago,’” she said. “Now we are seeing more claims related to, ‘It was defective,’ or ‘The service wasn’t provided.’”
Some of these claims are legitimate, and it’s reasonable to expect there would be more of them now, with businesses shuttered temporarily or permanently and unable to provide the level of service they once promised, says Eaton-Cardone. “But it doesn’t account for the amount of claims we are getting across the board.”
On top of this, customers are also demanding refunds because of canceled or postponed weddings, affecting photographers, florists and venues. Cancelled travel plans and events (like music festivals and plays) bring on a tsunami of returns and chargebacks.
“The merchants are getting hit from every direction,” says Eaton-Cardone.
Hit from all angles
Sometimes, though, businesses trigger the problem themselves. Many restaurant chains new to the delivery business are doing pre-authorizations on transactions, confusing their customers and triggering chargebacks in the process, says Eaton-Cardone.
This is happening with chains that previously had an app featuring its menu; now the business decides to offer food delivery as well, through the same app, but the company may not know exactly what it’s doing. Or a restaurant will take an order over the phone, then run a card when the delivery person drops off the meal.
One example: A restaurant runs an initial authorization of $20 for a delivery order of burgers and fries. Later, when one of the frayed employees has time, he will charge the credit card the actual fee for the meal, $32. But the $20 stays on the card for up to a month as a pending transaction, meaning for a few weeks, the customer is out $52.
The customer can’t access the $20 because it’s pending and will eventually be dropped in favor of the real, $32 charge. But perhaps the customer is cash-strapped and files a chargeback for what is accessible – the $32.
The worst part for the merchant is they have no right to dispute this type of chargeback. “No one was scamming anyone,” Eaton-Cardone said. “It’s just [the merchant’s] ignorance.”
What merchants can do
If a business is temporarily closed, there may be little a bank can do in terms of a consumer chargeback. However, merchants who are still open and dealing with a multitude of issues can make the best of the situation.
- Invest in online security. Businesses trying to prevent fraudulent transactions should invest in whatever level of online security they can afford, from 3DS, an anti-fraud messaging protocol, to authentication and identification technologies, French said. By taking steps to detect fraud, merchants can more easily identify transactions that could potentially lead to chargebacks.
- Monitor and review any unusual increase in chargeback activity, says French. Pay attention, for instance, to bank identification numbers (BIN). “Is it a U.S.-issued BIN but coming from IP address in a foreign country? That could indicate fraud,” says French.
- Respond quickly. By dealing with customer service issues promptly, you might be able to head off possible chargebacks. Especially if you’re new to e-commerce. If a customer expresses dissatisfaction, get in touch with them quickly to try and resolve the issue.
- Dispute chargebacks. Banks allow fewer chargebacks to be filed against merchants who regularly dispute them. It’s the most effective way to stop repeat friendly fraud.
- Find relief. Currently, Chargebacks911 is offering Pandemic Chargeback Relief for Merchants. The chargeback management company is “offering merchants near-immediate use of revenue recovery tools – without requiring a technical integration or long-term contracts.”
What consumers can do
Consumers have their own part to play, Eaton-Cardone said. Try to refrain from abusing the chargeback system to ease your own financial panic. But even if you do have a legitimate reason for requesting a refund, such as a flight you had to cancel due to a lockdown, ask yourself if you really need that money.
“My advice to any consumer – if you can afford it, can you not get a refund?” she asked. “I don’t think anybody appreciates how much it’s hurting the economy.”