A report from Salesforce suggests global online sales reached $1.14 trillion as holiday shoppers navigated post-COVID-19 inflationary environment in 2022. Similarly, Adobe released its online retail insights for the 2022 holiday season, covering the period from November 1 to December 31. The report analysed commerce transactions online, covering one trillion visits to US retail sites, 100 million SKUs and 18 product categories. Adobe’s report suggested consumers spent a total of $211.7 billion online from November 1 to December 31. The spending grew 3.5% year-over-year (YoY).
Additionally, new alternative payment methods have fuelled online and card-not-present transactions. Salesforce’s report suggests eCommerce businesses gained a bigger share of the holiday season spending. However, transaction experts warn merchants that an increase in online purchases and alternative methods of payment will also produce a correlated rise in chargebacks to start 2023.
Chargebacks take place when customers call their bank to refute a charge. As a result the bank provides them with an instant refund. The chargeback is taken from the merchant’s account. Chargebacks are an important mechanism to protect cardholders against fraudulent activity. However, statistics show that illegitimate chargeback claims have skyrocketed since 2020, leading to millions in unnecessarily lost revenue.
Sift report on first-party fraud
Last month Sift published a report which found that nearly 1 in 4 consumers admit to disputing a legitimate purchase. Purchasers reported that they didn’t receive their goods or there was an issue with the order, to get their money back. Sift found that chargeback dispute rates had risen over 35% since Q1 2022. As a result, everyday consumers are increasingly seeking to claw back money from businesses.
With fraudulent chargeback claims, or first-party fraud, accounting for as much as 70% of all credit card fraud. Monica Eaton, founder of Chargebacks911, warns merchants that some efforts to attract holiday shoppers may lead to an increase in chargebacks 30 to 60 days after a transaction.
“The rise in retail shopping exceeded market predictions this past holiday season, some analysts estimating by approximately $60 billion. It’s important that merchants are prepared for the wave of chargebacks that impact retailers this time of year,” says Eaton.
“When businesses stretch their marketing budget or payment options too far during the holiday season. They fail to allocate any spending toward the annual spike in chargebacks merchants face in the first quarter of the year. Many of which may be fraudulent.” According to some analysts, the total merchant losses from chargeback fraud are set to exceed $206 billion for Mastercard alone between 2021 and 2025.
New payment methods
Chargebacks are the fastest-growing problem for online merchants. The adoption of new payment methods, including credit cards, prepaid cards, cryptocurrency, and Buy Now, Pay Later (BNPL), have accelerated the incidences of first-party fraud. It has been estimated the market has seen a 35% increase in chargeback fraud since the start of the pandemic.
“Consumers are using newer payment methods like value-added cards, digital coins, and BNPL,” says Eaton. “Unfortunately, there hasn’t been enough education for eCommerce merchants to understand the unintended consequences of these payment methods.”
For example, Eaton notes that while a chargeback filed for a BNPL transaction often goes to the credit card provider and not the merchant. There may still be an increase in products being returned for a refund. Some consumers will make impulsive purchases on products they don’t have to pay for upfront, but still can’t afford. According to Eaton, retailers should study each credit card provider’s merchant dispute policies before entering into an agreement.
Retail inventory gluts, combined with labour shortages, are another factor increasing chargebacks in 2023. As the 2021 supply-chain shortages started to clear up last year, major retailers like Costco, Walmart, and Target saw 26% to 43% higher-than-expected inventory.
“Retailers with stockpiled inventory offer big discounts — which means potentially massive sales volumes,” says Eaton. “We saw how labour shortages caused shipping delays, and in some cases, people received their items after the holidays. This led to them filing a chargeback for a purchase they feel they did not receive in time. While merchants aren’t responsible for labour shortages or delays caused by shipping entities. Retailers bear all the financial consequences from unsatisfied customers.”
Protection from steep rise of chargebacks
According to Eaton, there are risk-management strategies that eCommerce and other retail merchants can use to protect themselves from the steep rise of chargebacks facing them in the first few months of 2023. To sustainably protect transactions for both the buyer and seller requires merchants to use technology more effectively. They need to effectively use more data intelligence and agile platforms for financial institutions.”
Additionally, Eaton urges consumers to first dispute transactions with the store they made the purchase. Rather than resort to filing a chargeback claim with their financial institution as their first step. Contacting the merchant first may resolve the dispute without unnecessary chargeback fees for the retailer. A cost that could ultimately be passed on to consumers through increased prices.
Some merchants are planning to curb the exploitation of returns by shortening return windows. Having a shorter return runway can help reduce the number of disputes teams will have to field. Retailers can also turn to technology to manage every aspect of a firm’s fraud operations. In particular, the ability to instantly detect and block risky transactions, shut off fraudulent currency movement. Retailers need to proactively prevent alternative payment abuse to protect their business down to every transaction. Digital chargebacks or friendly fraud is particularly challenging to manage since they can impact on a brand’s reputation. However, companies technology to identify this issue, so that they can take the appropriate actions.
As Eaton suggests, “Merchants need to tackle the growing complexities and challenges of dispute management. This requires ongoing innovation. We are dedicated to powering chargeback management for global eCommerce businesses and financial institutions at the highest possible level.”
