In times of economic uncertainty and recession, business owners face heightened pressure to protect their bottom line and maximize revenue. Amidst these challenges, a closer examination of declining profits reveals a significant but often overlooked culprit; chargebacks. Monica Eaton, founder and CEO of Chargebacks911, warns merchants of the subsequent increase in chargebacks that follows a recession and how retailers can prevent them from happening in the first place.
TAMPA, Fla., Aug. 7, 2023 /PRNewswire-PRWeb/ -- The Federal Reserve Bank of New York is predicting a 67% chance of a recession by June of 2024, with some experts citing that a "full employment recession" may lay ahead. While fraud of all types increases during times of economic uncertainty, Monica Eaton, founder and CEO of Chargebacks911, warns merchants to prepare for a surge in chargeback abuse by legitimate customers—which typically spikes in the wake of a recession and is already costing retailers billions in lost revenue each year—known as "friendly fraud."
Following the recent failures of two prominent regional banks, nearly half of the economists surveyed in a recent Bankrate study believe the odds of an economic downturn by the end of 2023 are 70% or higher, signaling that the chances of a recession are more probable than not.(1) The Federal Reserve is considering maintaining higher interest rates to address inflation, which could impact economic growth and consumer spending. With thinner wallets and waning confidence in the economy, consumers are more likely to dispute transactions, which in many instances result in merchants receiving a chargeback—a term for a forced refund inflicted by an issuing bank that comes with its own set of penalties and fees that impact a retailer's bottom line.
"While friendly fraud has been an ongoing issue, it was severely exacerbated by both COVID-19 in 2020 and skyrocketing inflation in 2022, which saw on average 72% of merchants reporting a rise in instances of friendly fraud," says Eaton. "Merchants, especially those that operate in eCommerce, need to learn from the economic impacts experienced thus far and prepare now to protect their bottom line from unnecessary losses."
Since 1974, chargebacks have been a legitimate consumer protection mechanism designed to protect cardholders, but an internal study by Visa reveals that friendly fraud accounts for up to 75% of all chargebacks.
Friendly fraud is a term for when a customer, either deliberately or unknowingly, files a chargeback for an illegitimate reason, resulting in lost product, forfeited revenue, and higher payment processing fees.
According to Chargebacks911's 2023 Chargeback Field Report, the average amount of customer disputes ranged from $25 to $75, with over 50% of credit card holders reporting that they filed their chargeback dispute with their bank without attempting to resolve the issue with the retailer first.(2) A $90 dispute will cost a business $191, nearly double the original transaction amount.(3)
A survey conducted by checkout.com reveals that 76% of merchants are concerned about the financial health of their businesses, and as of June 2023, their chargeback rates have increased by 27% over the past six months.(4) Data collected by The Fast Mode conclude that during a recession, average fraud-to-transaction ratios increase by 50%, fraud losses go up by 39%, and dispute-to-transaction ratios can swell by 42%.(5)
"The economic downturn currently impacting consumers and retailers serves as a stark reminder that every dollar counts," notes Eaton. "Customers' money is not going as far, and chargebacks represent a considerable drain on profitability for merchants. 'Frictionless' has become a theme extending well beyond the checkout process. And the ease with which cardholders can successfully file a chargeback with their banks, even for minor transaction disputes, unintentionally advocates for a higher volume of this negative trend."
First-party misuse is often unintentional; a customer may report a legitimate transaction as fraudulent because they don't recognize a purchase they made or the vendor's name on their billing descriptor. According to a survey conducted by Chargebacks911, 72% of consumers consider filing a chargeback the same as requesting a return from the retailer,(6) except it is much easier. However, a growing number of consumers are engaging in first-party fraud, which happens when a customer orders, receives and is satisfied with a purchase, keeps the item, and then files a chargeback to get a refund through their bank, which amounts to online shoplifting.
Eaton provides some tips for merchants to recession-proof themselves against chargebacks:
- Provide exceptional customer service.
- Keep customers in the loop when issues arise that may delay the delivery of their purchase.
- Review ineffective policies and procedures that may be triggering an increase in chargebacks.
- Be transparent and flexible regarding shipping, cancellation, and return policies.
- Take steps to reduce merchant error.
- Provide honest product descriptions; don't over-promise, mislead, or provide insufficient information.
- Be aware of the pitfalls of recurring-payment subscription models, such as automatic billing, which have a higher risk of chargebacks.
- Recognize friendly fraud when it happens, and engage a chargeback remediation expert. Do not accept chargebacks as just the cost of doing business.
To mitigate the financial devastation of chargebacks, especially under the inflationary pressures of a burgeoning recession, Eaton advises merchants to consistently respond to all chargeback disputes, even to confirm cases of legitimate fraud. This level of vigilance would provide banks with a more accurate understanding of each case to better identify instances of friendly fraud.
Eaton explains, "Streamlining the chargeback process through standardized data transmission and leveraging available technology can reduce errors and minimize the manual handling of disputes. Overlooking the root causes of chargebacks and gaps in shared knowledge perpetuate the vicious cycle of chargebacks. Solving this problem requires a concerted effort toward educating banks, retailers, and consumers on preventing a large percentage of chargebacks through more consistent and cross-functional communication."
Merchants can prepare for a predicted rise in fraud and chargebacks by seeking guidance from chargeback experts. Chargebacks911 analyzes merchant data to develop a tailored strategy, and their experts help businesses implement sweeping fraud prevention measures and establish efficient dispute resolution processes. For more information, visit https://chargebacks911.com.
About Chargebacks911
Chargebacks911 is a global leader in chargeback management and remediation technology. As a provider or supplier to financial technology companies and financial institutions, Chargebacks911 safeguards more than 2.4 billion transactions per year on behalf of clients in 87 countries around the world. For details on Chargebacks911's comprehensive dispute management solutions, visit https://chargebacks911.com.
References:
1. Foster, S. (n.d.). Survey: Recession likely after bank failures. Bankrate. bankrate.com/banking/federal-reserve/economic-indicator-survey-recession-risks-april-2023/
2. The 2023 chargeback field report. Chargebacks911. (n.d.). chargebacks911.com/chargeback-field-report/
3. What's the annual cost of chargebacks? the truth will shock you. Chargebacks911. (2022, July 12). chargebacks911.com/chargeback-costs/
4. The retailers handbook. The Retailers Handbook. (n.d.). insights.checkout.com/the-retailers-handbook#2
5. Figueroa, R. (2023, March 27). Preparing for recession-driven fraud and chargebacks. The Fast Mode. thefastmode.com/expert-opinion/31259-preparing-for-recession-driven-fraud-and-chargebacks
6. The 2023 "chargeback field report" is here! Chargebacks911. (2023, June 2). chargebacks911.com/the-2023-chargeback-field-report-is-here/
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SOURCE Chargebacks911
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