“According to a study conducted by Global Risk Technologies™, 81% of chargebacks were filed out of convenience. It was easier for the customer to contact the bank for a chargeback than obtain a refund from the merchant”
In the early 1970s, bank credit cards had not yet gained widespread acceptance in the US. This was because of consumer fear. People worried that the card could be lost or stolen or it can be used for unauthorized transactions with the original owner getting stuck with the bill.
There were also complaints of unethical merchants taking advantage of the consumer.
The Truth in Lending Act (TILA) is a federal law enacted in 1968 to help protect consumers in their dealings with lenders and creditors.
The Truth in Lending Act of 1968 laid the groundwork for credit card chargebacks. However, payment industry experts recognize The Fair Credit Billing Act of 1974 as the invention of chargebacks.
The Fair Credit Billing Act is a 1974 federal law designed to protect consumers from unfair credit billing practices. The promise of protection worked, as you can see by the current widespread use of credit cards for in-store and online payments.
“chargebacks will cost online merchants more than $30 billion a year by 2020”
When introduced, chargebacks were a form of consumer protection for credit cardholders. For cardholders exploited by fraudsters, a chargeback is the consumer’s backup plan. No matter what, the cardholder’s money is safe.
A chargeback – also called a “reversal” – is the return of credit card funds used to make a purchase to the buyer.
A chargeback can occur if a consumer disputes a purchase made using their credit card, claiming that it was fraudulent or made without their knowledge or permission. Chargebacks can occur because of fraud, customer disputes, merchant error, and other reasons.
“No matter where you turn, they’re always right, so you can’t do anything about the problem of chargebacks because, yes, ‘the customer is always right,'” David Katzaed, manager of clothes retailer Big Drop NYC told CBS News.
Chargebacks can appear very similar to traditional refunds, yet there is one very relevant difference: rather than contacting the business for a refund, the consumer is asking the bank to forcibly take money from the business’s account.
An investigation follows, and if the bank feels the cardholder’s request is valid, funds are removed from the merchant’s account and returned to the consumer; the consumer, on the other hand, is in no way forced to return whatever was purchased.
Example – You have made an online purchase of XYZ item. When delivered from the merchant, the item arrived broken or could not be used for the intended purpose. You contact the merchant for a return, but the merchant has inconsistent customer service, and you get no response in a reasonable time frame. The merchant still bears responsibility for the transaction, and you are justified in filing a chargeback.
“JP Morgan Chase estimates chargebacks are growing annually by20%while online sales grow at only 7%.”
All chargebacks fall into three main categories:
1. Actual Fraud: Actual fraud or true fraud begins when a fraudster uses a legitimate cardholder’s information to purchase an item from a merchant and the merchant shipped an order to the fraudster. The fraudulent purchase is disputed by the actual cardholder, files a chargeback requesting a refund from the cardholder’s bank. True fraud accounts for 29% of all fraud losses.
2. Friendly fraud: It is among one of the most common frauds which involve no malicious intent of the cardholder. It is closely related to chargeback fraud. It occurs when cardholders simply forget that they had made the purchase or the purchase had been made by the family members in their name without the knowledge of the cardholder. Friendly fraud accounts for 35% of all fraud losses.
3. Chargeback fraud: Both chargeback fraud and friendly fraud involve an invalid use of chargeback rights by a cardholder. But chargeback fraud is a purposeful misapplication of these rights. The goal of the dispute is to keep the product or service while enjoying a refund of the transaction amount. Chargeback fraud accounts for 35% of all fraud losses. This can also be called cyber shoplifting.
“The same Global Risk Technologies™ study found 49% of friendly fraud chargebacks resulted from a simple misunderstanding”
The purpose of chargebacks are-
● Chargebacks are designed to keep customers feel secure.
● Chargebacks also keep a check on dishonest merchants who might be tempted to sell inferior products or services.
● The threat of chargebacks helps merchants stay transparent.
● Chargebacks help protect cardholders from the effects of criminal fraud.
The reasons for chargeback requests-
● The product never arrived.
● The retailer shipped the wrong product.
● The product did not meet customer expectations.
● The product did not match the description mentioned on the website.
● The order was billed twice for the same product.