To show the true impact friendly fraud has on retailers, Chargebacks911 has released its 2024 Chargeback Field Report, giving merchants and financial institutions an understanding of the current state of chargebacks and the measures being taken by businesses to help stem the tide of chargeback abuse.
Presented in partnership with Edgar, Dunn & Company, this year’s Field Report surveyed nearly 300 retailers, from small businesses to enterprise merchants. One of the most alarming statistics revealed in the study was the spike in increased chargeback abuse; nearly three-quarters of respondents reported an 18% average increase in friendly fraud over the last three years.
While the chargeback process is necessary to protect consumers, the misuse and abuse of the system have caused reputational and financial damage to merchants. With 53% of cardholders disputing a transaction with their bank without contacting the retailer, merchants lose the ability to resolve disputes directly with the consumer.
“In the U.S., the right to dispute transactions is protected by federal law. Unfortunately, our survey results suggest that the majority of customer disputes are illegitimate,” said Monica Eaton, CEO of Chargebacks911. “Major card networks estimate that as much as 70% of all credit card fraud can be traced to chargeback misuse, or ‘friendly fraud,’ an issue that surveyed merchants say has increased nearly 20% over the last three years.”
According to Statista, retail e-commerce sales in the U.S. topped $291 billion from April to June 2024, the highest quarterly revenue in history. While this gives merchants a reason to celebrate, a leading concern among retailers is post-transaction threats like friendly fraud and refund abuse rising in step with online sales.
With chargebacks now easier than ever to file with an issuing bank, Mastercard reports that money lost to chargebacks cost merchants an estimated $117.47 billion in 2023. What’s more concerning is that merchant errors remain a leading cause of customer disputes. For example, confusing or unrecognizable billing descriptors were the leading cause of chargebacks. However, one-third of merchants said they did not know exactly how their billing descriptor appears on customer billing statements.
While suspected fraud is a valid reason to file a dispute with their issuer, the main motivation for cardholders to seek resolution with their bank rather than the merchant was a matter of convenience. Nearly half of respondents claimed 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.
Chargebacks911 said the best response for merchants to address this trend is to prevent and confront it through systems like chargeback alert programs and the representment process.
Of the most useful tools being utilized to address post-transaction fraud and misuse, merchants are leaning heavily on machine learning and AI to aggregate, analyze and act on transaction data. Roughly 62% of retailers said they are already using or plan to use AI-based technology to identify and address instances of friendly fraud.
“Chargeback data can serve as a powerful KPI, useful for both more accurate decisioning and fine-tuning strategies,” said Eaton. “It’s worth pointing out that according to our survey, merchants who used a third-party solution or software were twice as likely to know their tracking numbers.”
Card networks themselves are more aware of the impacts friendly fraud is having on merchants and have rolled out new dispute rules to help create a more balanced chargeback framework. Updated rule sets like Visa’s Compelling Evidence 3.0, and Mastercard’s First-Party Trust Program help businesses protect honest transactions and prevent illegitimate disputes by allowing for more transaction information to be submitted by retailers, including purchase history and IP addresses.