It is not news that COVID-19 led to a rise in e-commerce as consumers shifted to contactless payment options instead of shopping in-store. The same held true for restaurants, where once common card-present transactions shifted to card-not-present transactions paired with contactless pick up and curbside delivery.

This payment environment shift caused by the pandemic led to a significant spike in chargebacks for merchants of all types. Fortunately, there are steps that merchants can take to protect their interests and reduce their exposure to chargebacks.

What are chargebacks?

According to Mercator Advisory Group, a chargeback “can be understood as a reversal of a credit card transaction that is initiated by either a customer or their card-issuing bank.”

Card network rules allow cardholders to initiate disputes both for invalid or fraudulent transactions and for issues related to the quality of goods or services, or legitimately purchased but not delivered goods or services. When a merchant’s processor receives a chargeback, the merchant is debited funds for the transaction amount and the consumer receives provisional credit. If the dispute is ultimately resolved in favor of the cardholder, the provisional credit becomes permanent and the merchant loses out.

It is worth noting that this explanation of a chargeback is extremely simplified-chargeback initiations follow several additional steps and involve card networks, acquiring banks, issuing banks, merchants, and consumers. If the dispute is not resolved in the cardholder’s favor, they may file a second chargeback with new evidence backing the validity of the dispute and restart the process.

Over time, it has become easier for consumers to begin the transaction dispute process. As a result, card networks and issuers have become less likely to thoroughly review individual claims. Rather, they are likely to initiate any dispute that a cardholder requests. At that point, proving that a dispute is invalid becomes the merchant’s responsibility. This results in higher chargeback risk and exposure for merchants.

What causes credit card disputes?

According to Kount, delivery delays, trouble scaling, and customer service delays are the three top causes behind chargebacks. COVID-19 specific factors such as the interrupted supply chain and shortage of workers are also contributing, as well as pre-existing factors such as merchant errors and, of course, actual fraud attacks.

“As merchants are bound to experience logistics and supply chain issues this holiday season, it is of paramount importance to actively prevent as many chargebacks as possible through planning and targeted solution development,”  noted Amy Dunckelmann, VP of Research Operations at Mercator Advisory Group.

Another major cause of merchant chargebacks is friendly fraud. Friendly fraud occurs when customers dispute transactions they had previously authorized or benefited from. There are multiple categories of friendly fraud.

For example, accidental usage fraud occurs when a consumer who made a legitimate purchase does not recognize it due to limited information on their credit card statement. As a result, they dispute the transaction. Another example of friendly fraud is shared card fraud. Many family members share cards. If one person uses the card without informing the other, the second card user might assume it was fraud and dispute the transaction. Merchant errors, policy abuse fraud, and in-flight refunds, or customers initiating chargebacks when they don’t receive a refund quickly enough, are other categories of friendly fraud.

Friendly fraud is a significant cause of chargebacks. According to Chargebacks911, 80% of surveyed merchants saw an increase in friendly fraud from 2019 to 2021; 68% of these merchants attributed the increase to the pandemic. Meanwhile, Chargeback Gurus found that merchants attributed one in three (32%) chargebacks to friendly fraud. As a significant contributing factor to fraudulent chargebacks, merchants must have the correct tools in place to address friendly fraud.

How merchants can prevent chargebacks

While chargebacks are a costly and prevalent issue, there are several steps merchants can take to reduce the number of customer transaction disputes and minimize losses.

To learn more about the current state of the chargeback landscape and how merchants can mitigate these risks, see Mercator Advisory Group’s recent research, Chargebacks: Increases in Credit Card Disputes Threaten Merchant Profitability.