2023 Chargeback Field Report: Friendly Fraud, First-Party Misuse Skyrockets to Pandemic Levels, Industry Survey Reveals

Fraud Detection
30.05.2023 12:30 pm

Chargebacks911, the first company dedicated to providing chargeback remediation services to the world’s largest banks and businesses, released its 2023 Chargeback Field Report, giving retailers and financial institutions an understanding into the current state of friendly fraud, first-party misuse and chargeback management within eCommerce and card-not-present (CNP) transactions.

Presented in tandem with Digital Commerce 360, this year’s Field Report features for the first time insight from more than 4,000 consumers who were surveyed on their preferred transaction dispute processes and perception of chargebacks in general, giving banks and businesses indicators as to what may be fueling the steady rise in chargeback fraud.

After surveying more than 300 retailers—from small businesses to enterprise merchants—one of the most alarming statistics revealed in the 2023 Chargeback Field Report was the spike in increased chargeback fraud; nearly three-quarters of surveyed respondents reported a 19 per cent average increase in friendly fraud. More than half of respondents said that friendly fraud is a significant or moderate concern for their business.

With this statistic rivaling 2020 quarantine levels, transaction dispute experts at Chargebacks911 say this is a cause for concern for online retailers.

“When we saw in 2021 that 76 per cent of surveyed merchants reported an increase in friendly fraud, we were concerned, but not shocked, given that many storefronts were closed in 2020 and everyone was forced to do their shopping online where fraud is rampant,” said Monica Eaton, CEO of Chargebacks911. “But now that we are well past the confines of the pandemic and that number remains the same, more action is needed to quell the ongoing rise in chargeback abuse.”

The 2023 Chargeback Field Report showed that friendly fraud was a much larger concern than criminal fraud. When asked to estimate the percentage of chargebacks that were the result of friendly fraud, merchants reported an average of 44 per cent—with retailers making more than $100 million in annual revenue being more likely to identify disputes as friendly fraud.

Responses from the Field Report’s consumer survey revealed a strong disconnect between shoppers and the inner workings of the chargeback process. When cardholders were asked how many transactions they had disputed with their bank in the previous 12 months, the average number was six, with more than half of cardholders admitting to filing a chargeback with their bank without ever trying to contact the merchant.

Additionally, 72 per cent of cardholders considered filing a chargeback with their bank a valid alternative to requesting a refund from the merchant and 75 per cent of respondents considered the two dispute methods to be equivalent. Chargebacks911 Chief Growth Officer Pel Faquiryan says this misunderstanding is fueling the chargeback crisis and costing retailers billions in lost revenue.

“Most customers are unaware of what goes on behind the scenes when a chargeback is filed and I’m sure they would be surprised to know that merchants pay on average around $3.60 for every dollar lost to a fraudulent or illegitimate chargeback,” said Faquiryan. “Sometimes, retailers will raise the prices of goods and services to make up for lost revenue, passing along the cost of chargeback fraud and misuse to the customer.”

With chargebacks now easier than ever to file with an issuing bank, Mastercard reports that money lost to chargebacks will cost merchants an estimated $117.47 billion in 2023.

The main motivation for cardholders to seek resolution with their bank rather than the merchant was a matter of convenience, according to the Field Report, with nearly half of respondents claiming that the speed of resolution was the primary factor for filing a chargeback. Retailers must now compete with cardholders’ banks as to which can be more accommodating.

The experts at Chargebacks911 say the best response for merchants to address this trend is two-pronged: prevent and confront.

Just 32 per cent of surveyed merchants said they currently use an alert system to resolve disputes and prevent chargebacks from being filed, but those merchants reported a 27 per cent average reduction in chargebacks. Available alert solutions include Verifi Order Insight by Visa, Ethoca Consumer Clarity by Mastercard, and Rapid Dispute Resolution.

Merchants of all sizes are encouraged to challenge any chargeback they receive that shows signs of friendly fraud or first-party misuse, according to Chargebacks911. The majority of surveyed retailers say they have an internal team dedicated to managing chargebacks, but when comparing the numbers reported by merchants, the report found that companies who leverage representment software and services through a platform provider saw a net recovery rate more than 55 per cent higher than merchants that managed the process internally.