Post-COVID-19 holiday shoppers flocked to online sales in unprecedented numbers in 2022, bringing along with it an increased risk of chargebacks. Monica Eaton, founder of Chargebacks911, advises eCommerce merchants to act now and protect themselves from first-party fraud.
As holiday shoppers navigated the post-COVID-19 inflationary environment in 2022, global online sales topped $1.14 trillion, according to a report from Salesforce.(1) Additionally, new alternative payment methods have fueled online and card-not-present transactions. While eCommerce businesses gained a bigger share of the holiday season spending, transaction experts warn merchants that an increase in online purchases and alternative methods of payment will likely include a correlated rise in chargebacks to start 2023.
Chargebacks occur when customers call their bank to refute a charge, and the bank provides them with an instant refund, which they take from the merchant’s account. While chargebacks are a necessary failsafe to protect cardholders against fraudulent activity, statistics show that illegitimate chargeback claims have skyrocketed since 2020, leading to millions in unnecessarily lost revenue.
With fraudulent chargeback claims, or first-party fraud, accounting for as much as 70% of all credit card fraud,(2) 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.
“With the surge in retail shopping exceeding market predictions this past holiday season 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.”
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Total merchant losses from chargeback fraud are set to exceed $206 billion for Mastercard alone between 2021 and 2025.(3)
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, with an estimated 35% increase in chargeback fraud since the start of the pandemic.(4)
“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 more often than not goes to the credit card provider and not the merchant, there may still be an increase in products being returned for a refund, as consumers are more likely to 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 labor shortages, are another factor increasing chargebacks in 2023. As the supply-chain shortages from 2021 started to clear up last year, large retailers like Costco, Walmart, and Target saw 26% to 43% higher-than-expected inventory.(5)
“Retailers with stockpiled inventory offer big discounts — which means potentially massive sales volumes,” says Eaton. “We saw how labor shortages caused shipping delays, and in a lot of cases, people received their items after the holidays, leading them to file a chargeback for a purchase they feel they did not receive in time. While merchants aren’t responsible for labor shortages or delays caused by shipping entities, they bear all the financial consequences from unsatisfied customers.”
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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 utilize better technology, more data intelligence, and agile platforms for financial institutions and eCommerce sellers like the transaction dispute solutions Chargebacks911 offers.
Additionally, Eaton urges consumers to first dispute transactions with the store they made the purchase with 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.
“Tackling the growing complexities and challenges of dispute management requires ongoing innovation,” says Eaton. “We are dedicated to powering chargeback management for global eCommerce businesses and financial institutions at the highest possible level.”