The terms chargeback, reversal and payment dispute all refer to the same thing. It’s when a credit card company reimburses a buyer for a purchase, usually at the expense of the merchant, or vendor.
Chargebacks have long been more than a pesky problem for vendors due to the direct cost of these reversals, plus the cost of potential fees from credit card companies. Additionally, many vendors also bear the expense of either investing in payment systems with better fraud protection, or fighting chargeback initiations as they occur, which is very time consuming. Whatever the case, chargebacks are on the rise and they’re costing retailers billions each year, especially from fraud.
Globally, gross fraud losses reached $28.65 billion in 2019, up 2.9 percent from a year earlier. They’re expected to hit $32 billion in 2021, and $35 billion in 2025, according to Nilson Report, which tracks Card Fraud losses worldwide.
So, most chargebacks are initiated due to fraud, such as a purchase made without the knowledge or permission of the cardholder.
In other cases, the cardholder initiates a claim on a purchased item, sometimes legitimately, other times less so. That’s why this type of chargeback initiation is sometimes referred to as ‘friendly fraud,’ which is when a consumer is either aware of or complicit in a transaction but report it as unauthorized. These, as well as legitimate consumer claims, are growing, and seemingly at an increasing rate due to Covid-related supply-chain disruptions.
Over the past year, shipping delays have stressed consumers, many of whom were already strapped by income losses. Their reaction has been to file more disputes against their purchases – they’d rather have the money.
Of 500 US companies surveyed, 58 percent say they believe their chargeback rates have increased since March 2020. Of these, 45 percent chalk it up to delivery delays. That’s according to fraud-prevention firm Kount, a unit of Equifax Inc.
Herein is part of the problem. While chargebacks are designed primarily to protect consumers from fraud, which they do, they also transfer the cost burden of fraud primarily to merchants. In the US, the system grew out of the Fair Credit Billing Act of 1974, which created the chargeback to address consumer fears of lost or stolen cards.
Broadly speaking, this gave banks the power to refund a cardholder, void the transaction, and withdraw the funds that were deposited into the merchant account.