As online shopping and virtual credit card payments continue to increase year over year, so does credit card fraud. Since 1974, federal regulations have been in place to protect credit card users from fraud, unfair credit billing practices, and suspicious transactions. Chargebacks are among the rights granted to consumers to dispute purchases they have reason to believe are illegitimate or unfair. Monica Eaton, founder and CEO of Chargebacks911, wants consumers to be aware of their rights and how to exercise them but cautions that the abuse of the chargeback process can do more harm than good.
TAMPA BAY, Fla., June 19, 2023 /PRNewswire-PRWeb/ -- In 2022, 60% of adults in the U.S. were living paycheck to paycheck, and with inflation at a 40-year high,(1) consumers are pulling out their credit cards more often to keep up. At the same time, credit card fraud is accelerating. Monica Eaton, founder and CEO of Chargebacks911, encourages consumers to be vigilant when combatting fraudulent charges but to be aware of unintended consequences when disputing legitimate transactions with their bank.
In a follow-up to their 2021 Credit Card Fraud Annual Report, Security.org found that 65% of credit and debit card holders have been victims of fraud at some point in their lives; that's the equivalent of 151 million people, up 58% from the year before. In 2022, 44% of credit card users have had two or more fraudulent charges, up 9% from 2021.(2)
Online shopping has risen steadily since the pandemic and shows no signs of slowing down. In 2023, 80 million more people will be engaging in eCommerce than in 2022,(3) which leads to a parallel increase in card-not-present (CNP) charges. In 2023, the losses from CNP fraud are expected to account for $9.4 billion in losses, up 8.5% from 2022, and will comprise 73% of all credit card fraud losses, up a whopping 57% from 2019.(4)
"Gone are the days of waiting for a paper credit card statement each month," says Eaton. "Transactions are approved in an instant, and information can be accessed online 24/7. It is critical for consumers to consistently monitor their credit card activity because criminals are working every day to develop new ways to steal sensitive information."
The Fair Credit Billing Act of 1974 is a federal law that limits consumer liability and provides protection from unfair billing practices. One of the regulations allows consumers to dispute credit card charges they disagree with and request a refund from their credit card issuer, known as a chargeback.(5)
Eaton elaborates, "Chargebacks are a practical course of action for consumers in the fight against fraud, identity theft, unauthorized transactions, or when a merchant fails to deliver products or services as promised. Chargebacks also incentivize retailers to be on their best behavior."
The top reasons consumers file a chargeback with their financial institution include the following:
1. Goods or services not delivered on time.
2. Damaged or defective items.
3. The amount charged by the merchant was not correct.
4. Outright criminal fraud, which occurs when a consumer's card information has been stolen by a third party and used to make purchases illegally.
5. Buyer's remorse. (A prime example of "friendly fraud.")
6. A family member makes a purchase unbeknownst to the cardholder, aka family fraud.
7. Affiliate marketing scams, for example, a fraudster creates an ad or webpage for a nonexistent product or service using a legitimate company's branding and credentials.
8. An easy out to a subscription service a consumer forgot about, regrets, or no longer wants.
9. An inaccurate product description.
10. Cyber shoplifting, which occurs when a consumer takes advantage of the chargeback process by ignoring return policies, refusing to wait for merchant refunds, or attempting to get something for free by making purchases and then disputing them later through their bank.(6)
First-party misuse is carried out by the consumer themselves when there is an innocent misunderstanding. In cases of first-party misuse, the disputed transaction is a legitimate purchase made by the consumer or an authorized user; however, the cardholder may forget they made the purchase, do not recognize a company's name, or have other reasons to doubt the authenticity of the charge. Consumers may also deliberately bypass disputing the charge with the original merchant and initiate the chargeback process with their card issuer either to save time or to avoid dealing with the retailer directly.
Friendly fraud is when consumers knowingly file a chargeback on a legitimate transaction for a product they received and are satisfied with, hoping to keep the product and the money they paid for it. Some friendly fraudsters may even try to "double dip," contacting the merchant for a refund and the bank to file a chargeback at the same time, essentially getting two refunds for one transaction.
Merchants tend to carry the burden of proof when a transaction is under dispute,(7) however, cardholders must provide just cause. There is a process that card issuers and merchants follow to approve or deny the claim. A consumer will be denied a chargeback if, after an investigation, the evidence from the merchant contradicts the cardholder's claim, such as proof of purchase, sales/delivery confirmation receipts, or any agreed-upon contracts. Consumers must also be aware of the timeframe for submitting a chargeback. The Fair Credit Billing Act of 1974 mandates that cardholders have a minimum of 60 days to file a chargeback, but many card issuers allow 120 days to dispute a charge.(8)
Banks have inadvertently made filing a chargeback a more attractive option for consumers by making the process quick and easy. However, there can be unforeseen consequences for cardholders who abuse the chargeback process. A retailer may blacklist the customer, prohibiting them from making future purchases. If a cardholder files a chargeback thinking it will be faster and easier than going through the merchant, and the merchant wins the dispute, the consumer will have no other options to recover the money they may have otherwise received if they initially took their dispute to the merchant. If a consumer is found to be crying wolf too many times, they may be perceived as a liability, and the card issuer may close the cardholder's account, which may negatively affect the consumer's credit score.(9)
Research conducted by PaymentsJournal.com revealed that 80% of chargebacks could have been prevented if customers simply contacted the retailer first.(10)
Merchants bear the brunt of the cost of chargebacks through lost merchandise and sales, as well as penalties and fees. Card issuers incur increased costs due to write-offs and additional operating expenses. And consumers are ultimately impacted should the retailer choose to recuperate those additional costs by charging higher prices, effectively passing on chargeback costs to the consumer.
"There needs to be an open collaboration between consumers, merchants, and card issuers," Eaton says. "Retailers want to retain their customers and are usually willing to negotiate a satisfactory resolution for both parties. Financial institutions should also encourage customers to work with the merchant before committing to a chargeback. Through three-way communication, merchants, banks, and consumers can better protect themselves from the inherently negative consequences of chargebacks."
About Monica Eaton
As an acclaimed entrepreneur, speaker, and author, Monica Eaton is widely recognized as a thought leader in the FinTech industry and a champion of women in technology. She established her entrepreneurial credentials upon selling her first business at the age of 19. When a subsequent eCommerce venture was plagued by revenue-leeching chargebacks and fraud, Eaton rose to the challenge by developing a robust solution that combined human insight and agile technology. Today, her innovations are used by thousands of companies worldwide, cementing her reputation as one of the payment industry's foremost experts in risk management, chargeback mitigation, and fraud prevention. Monica Eaton is honored to be the recipient of various industry awards. Her own expertise, as well as the services provided by her companies, has been recognized as outstanding by her peers and other industry leaders. Visit http://www.monicaec.com.
References:
1. Jdickler. (2022, September 30). Unrelenting inflation is taking a toll, leaving more Americans living paycheck to paycheck. CNBC. cnbc.com/2022/09/30/stubborn-inflation-forces-more-americans-to-live-paycheck-to-paycheck-.html
2. 2023 credit card fraud report. Security.org. (2023, May 22). security.org/digital-safety/credit-card-fraud-report/
3. Gaubys, J. (n.d.). How many people shop online in 2023? [updated Feb 2023]. Oberlo. oberlo.com/statistics/how-many-people-shop-online#:~:text=With%20the%20rise%20of%20ecommerce,33.3%25%20of%20the%20population%20worldwide
4. Lebow, S. (2023, January 23). Card-not-present fraud to make up 73% of card payment fraud. Insider Intelligence. insiderintelligence.com/content/card-not-present-fraud-payment
5. DeNicola, L. (2022, March 21). What is the Fair Credit Billing Act?. Experian. experian.com/blogs/ask-experian/what-is-the-fair-credit-billing-act/
6. Why do customers file disputes?. Chargebacks911. (2023b, February 22). chargebacks911.com/chargeback-reasons/#:~:text=Some%20of%20the%20most%20common,buyer's%20remorse%2C%20and%20criminal%20fraud
7. PaymentsJournal. (2022, August 9). Merchants carry the "burden of proof" in chargeback disputes: PaymentsJournal. paymentsjournal.com/merchants-carry-the-burden-of-proof-in-chargeback-disputes/
8. Chargeback time limits: The merchant's guide for 2023. Chargebacks911. (2023b, March 9). chargebacks911.com/chargeback-time-limit/#:~:text=Appealing%20the%20representment%20decision%20must,case%20progress%20to%20Discover%20arbitration.
9. What happens if you file a false chargeback claim?. Chargebacks911. (2022, November 29). chargebacks911.com/false-chargeback-claims/
10. Katz, M. (2018, September 30). Solving the chargeback triangle. PaymentsJournal. paymentsjournal.com/solving-the-chargeback-triangle/
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