You know the scenario–a customer demands a refund for a product they purchased, but they’re not eligible for it.
Maybe they destroyed the product. Maybe they claim they didn’t receive the right product, despite documentation on your end confirming they did.
The next day after being denied, they call you back. Only this time, their credit card company is on the line, and ready to go to bat for their money.
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It’s called a credit card chargeback, and it was originally created to protect consumers from unscrupulous merchants. Yes, there are legitimate chargebacks.
But according to data from Chargebacks 911, up to 85% of all chargebacks are likely fraudulent, and credit card chargeback fraud is growing by 41% year-over-year.
Why is it a big deal? Because they add up.
In general, legitimate and illegitimate chargebacks online merchants more than $40 billion annually in product loss, fees, and other expenses.
Monica Eaton-Cardone, COO and co-founder of Chargebacks911, got on the phone with us to discuss the state of credit card chargeback fraud, why it’s a growing problem, and how ecommerce merchants can avoid these issues in the first place.
Who’s Committing Credit Card Chargeback Fraud?
Interestingly, there’s a gender divide when it comes to chargebacks.
According to Chargebacks911, women are mainly responsible for 76% of all chargebacks, including fraudulent cases.
Eaton-Cardone believes this is because traditionally, women have controlled the purse strings in families, and this extends to ecommerce today.
“So if we take a look at the primary buyer online, the decision makers are typically women,” says Eaton-Cardone. “One of my favorite quotes is a quote from Jack Ball of Alibaba–someone had asked him what’s causing the internet to grow so rapidly, and he said the secret is women.”
Online shopping taps into three key values for busy women (and anyone, for that matter): efficiency, cost-effectiveness, and time.
“The world is very different than it was 10 years ago,” continues Eaton-Cardone. “Women can also multitask more efficiently by buying more things online, find that things cost less, and more importantly, save time–especially for mothers.”
Women also have a tendency to pay more attention to the details.
“Many of us will call and complain if we get overcharged 30 cents. It’s been proven this attention to detail is definitely a part of our makeup as women. The same issue is carried out throughout the world–China has the same statistics as the U.S., so it’s not limited to culture.”
Why is Credit Card Chargeback Fraud Growing Online?
Eaton-Cardone points to a couple reasons why credit card chargeback fraud is growing online: consumer entitlement and higher standards for customer service.
But which came first? Were customers demanding fast and free shipping before Prime, or did Prime set a precedent?
“We’re not sure if technology is evolving consumer behavior or vice versa,” says Eaton-Cardone. “Regardless, the two of these working together have created new evolving habits and demands.”
Beyond just shipping, customers now complain more about things like packaging and return policies. The bar is getting higher for all ecommerce sites.
“We’ve created these amazing customer service policies with the goal to provide good service and create customer loyalty. However, it’s now created new standards–we have consumers that now believe if they didn’t get their product overnight, or can’t return it within a year if they’re dissatisfied, then they can simply call their bank and file a chargeback.”
There’s also the fact that technology makes credit card chargeback fraud so much easier to commit.
“It’s a digital transaction, not a human process–so none of us feel any guilt when we’re working with a bank to get a refund, not necessarily a seller,” says Eaton-Cardone. “You’d may feel OK pretending you never received those shoes and requesting a refund, while you wouldn’t consider going into a store and stealing a pair of shoes off the shelf.”
How Have Merchants Been Responding to Credit Card Chargeback Fraud?
Traditionally, chargebacks have been a line item for doing business. In the past, not many customers would take advantage of it. However, as ecommerce exploded in the past 10 years, things changed.
“As the industry has grown, not enough merchants have defended themselves, and we’ve seen the chargeback numbers increase,” says Eaton-Cardone. “There’s nothing yet to counter the policies in place.”
In other words, most sellers don’t fight chargeback fraud.
Instead, they’re focusing on are how they can prevent chargebacks in the first place– particularly in apparel, where the rate of return is already so high.
This is part of the reason why clothing rental companies such as Rent The Runway and Le Tote have been so successful.
“The rental clothing industry is so brilliant because that’s what people were doing before–only there was no industry,” says Eaton-Cardone.
Aside from try-before-you-by programs, sellers spend a lot of time looking at what is the best defense they have against chargebacks–their return policy. Eaton-Cardone points to one big merchant who has really tightened up return policy standards in the past few years: Amazon.
“Amazon started out just like Zappos–totally on the defense, just considering whatever the customer says is right,” says Eaton-Cardone. “But Amazon has grown so rapidly and has taken up so much market share, they’ve decided they need to impose policies.”
“Now, on Amazon, they have very strict 30-day return policies, which used to not be the case. On top of it, they have strict requirements–and will proactively dispute and will even win back funds on credit card chargeback fraud cases.”
How to Combat Credit Card Chargeback Fraud
Now that you have all the details, it’s time to talk about how you can combat credit card chargeback fraud.
One of the ways you can do that is by proactively planning for chargebacks. It doesn’t mean as an apparel retailer that you should start a clothing rental line like Le Tote’s, but it could mean you need to get more creative.
“If a company caters to a female-dominant demographic, they should proactively plan for more chargebacks,” advised Ms. Eaton-Cardone. “This means using ultra-precise language when describing products, posting up-to-date images from various angles, investing in high-end customer service, and creating a clear and transparent refund policy.”
High-end women’s apparel company Halsbrook does a great job of providing the right information up front (along with easy access to contact information in the top left corner):
If you do you choose to fight credit card chargeback fraud, you probably shouldn’t attempt to do that on your own.
There are several companies or lawyers you can work with to resolve disputes directly with the cardholder or the issuing bank in order to get your money back on illegitimately filed chargebacks. This requires is that you outline your terms and conditions and provide proof the customer violated the policy.
“For example, a seller may have a dispute complaint from a seller who contacted Capital 1 about shoes they didn’t receive. A credit card chargeback specialist can help the seller prove there was a delivery made, and show proof that the buyer know they did receive these shoes with a signed delivery receipt,” says Eaton-Cardone.
At the end of the day, not all customers start out as chargeback fraud artists, reminds Eaton-Cardone.
“Most customers who file chargebacks start out totally innocent, but once they realize how easy it is, they do it again and again.”
However, as more ecommerce companies acknowledge this is a problem and proactively tighten policies, it will help all ecommerce sites lower the number of fraudulently filed chargebacks.