The Holiday Gift on No Retailer’s Wish List: Chargeback Fraud 

An interview with Ariel Chen, CEO and CO-Founder, Chargeflow

The holiday season is rapidly approaching. And for most merchants, the end of the year is a peak sales period. Black Friday, Cyber Monday, Thanksgiving, and Christmas all drive a wave of consumer spending.

But there is one thing that can hurt the festive spirit: chargeback fraud. Experts report that chargebacks will cost merchants over $100 billion in 2023. And those fraud losses only jump during the rush of the Holiday season. Retailers must gain a clearer understanding of chargebacks and their potential consequences.

In this article, Chargeflow CEO and CO-Founder Ariel Chen will delve into the impact of chargebacks during the busiest shopping season. Using his expertise, Ariel will explain how you can mitigate disputes this holiday season.

Ariel briefly define what a chargeback is and how it threatens merchants’ revenues during the holiday season.

What are those direct and hidden costs?

Why are chargebacks growing into such a problem?

What chargeback trends should retailers look out for during the holidays?

Can you talk more about how friendly fraud increases during the holiday season?

What can retailers do to prepare for holiday season chargeback fraud?

A chargeback is a fund reversal initiated by a customer. For numerous reasons (typically fraud), a customer may dispute a charge found on their credit card statement. If the card issuer deems the dispute valid, the sales revenue debits from the merchant and returns to the customer.

While a chargeback is necessary for consumer protection, it creates a lot of expense for retailers, both direct and hidden. Now, we all know unexpected revenue losses hurt any time of the year. But in the holiday season and its increase in shopping activity, chargebacks limit merchants during a crucial sales season.

Direct costs are easy to see in your finances. They are visible as chargeback fees, issuer penalties, and any lost product value. But there are hidden expenses as well. Examples include administrative burden, operational overhead (chargeback disputes are very time-consuming to defend against), damage to your store's reputation, limited cash flow, and a decrease in customer satisfaction.

Chargebacks occur for numerous reasons, so the increase in dispute volume is driven by several factors. Here are three common points:

First, chargebacks are now relatively easy for a customer to initiate. Card issuers have streamlined the dispute process, and that convenience results in more chargebacks. That also leads to friendly fraud, as some consumers try to abuse their consumer protections.

Second, fraud continues to grow in sophistication. Experts estimate that 2023 fraud losses will reach $48 Billion, up from just $17.5 Billion in 2020. The more fraud there is the more chargebacks.

Lastly, the growth of eCommerce naturally leads to more disputes. As people turn to online shopping, it gets harder for merchants to manage everything. That leads to mistakes, issues with scale, or even everyday shipping problems—all of which could result in a chargeback.

First, expect an increased effort from fraudsters. This is peak traffic season, and bad actors will try to discover any weak points. Watch for promotion abuse, fake gift cards, or scams aimed at untrained seasonal hires. Fraudsters exploit these during hectic times.

Second, watch out for a change in customer behavior. The holiday season comes with high customer expectations, as people need exact delivery dates and product quality. Dissatisfaction can lead to friendly fraud.

Third, we often see an increase in merchant errors. Resources get strained with the seasonal busyness, and that can contribute to the holiday chargeback surge.

Customers feel the same sort of pressure as merchants during the holiday season. Friendly fraud is often the result, whether on purpose or by accident.

For example, someone on a spending spree might forget they made a purchase. Later, when they see a mystery charge on their credit card, they initiate a dispute.

Other consumers might buy a gift but then later second-guess themselves. That's called buyer’s remorse. It is all too easy to engage in chargeback fraud when you feel regret.

Holidays also include shared credit payments by families, coupon use, and gift returns. Those services all contribute to confusion, which unknowingly leads to friendly fraud.

Every chargeback mitigation strategy is unique, as every business has its problems. But for this holiday season, here are some action steps every merchant can take:

  1. Invest in refunds, not chargebacks. A refund does include the loss of a sale, but it is far less costly than a chargeback. A robust return policy is a good idea this season.

  2. Invest in customer service. Good customer service is the ideal antidote to chargebacks. You can defend against all sorts of friendly fraud with effective service reps. Since the holidays are busy, boost up service resources.

  3. Prepare for peak fraud traffic. Prevention is better than recovery. Educate all team members about your fraud defense strategy. Catch the influx of holiday fraud before those false sales become a dispute.

  4. Use chargeback solutions to handle your complete chargeback cycle. These experts can help you defend against disputes and recover more revenues.