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How are merchants handling the surge in Covid-19 chargebacks?

Disputes and chargebacks are often viewed as a necessary evil in ecommerce. But the pandemic has made them a serious threat to business and revenue. How are you fighting back?

25 May 2022

How are merchants handling the surge in Covid-19 chargebacks?

Disputes are part and parcel of ecommerce. But this doesn’t make them any less frustrating. They are difficult to manage and can often be an indicator of fraud. And if that dispute becomes a chargeback, it can greatly impact your bottom line. This has never been more true than over the past two years.

The pandemic has seen merchants hit by wave after wave of chargebacks – both legitimate and not. So you’re not just losing out to massive bank fines and charges but also friendly fraud.

That said, not all disputes are worth fighting. And you don’t want to end up draining resources for little gain. This is where a solid strategy for resolving disputes and challenging chargebacks comes into play.

In our Online Merchant Survey Report 2022, we asked merchants how they handle disputes and how successful they are. So, how has the pandemic impacted disputes and what is the best practice for challenging them?

Why has Covid-19 led to a spike in disputes?

Why are legitimate disputes on the rise?

Covid-19 restrictions meant that many customers were forced to cancel holidays and events that they could no longer attend. And in many of these cases, they were encouraged to file chargebacks to recover funds. This saw chargebacks soar to “nightmarish” levels.

Restrictions have eased but this behavior is here to stay. To the extent that almost 40% of shoppers in Australia, the UK and the United States said they are initiating more disputes today than before the pandemic.

The increase in disputes is also a sign that fraudsters are using the commotion of the pandemic to their advantage. Online payment fraud has shot up for almost 60% of merchants and around 80% consider it to be a top three risk. A key function of the chargeback process is to protect legitimate customers from fraudsters who’ve gotten their hands on their credentials.

How has this impacted fraud?

As mentioned, not all claims are legitimate. And this is where things can get tricky. Friendly fraud (or first-party fraud) refers to customers filing unnecessary disputes to get out of paying. You can’t underestimate the desire to get something for nothing!

By exploiting loopholes in the system, consumers have turned merchants into victims. Friendly fraud increased for almost 50% of merchants in 2021 and, for some, it’s actually superseding third-party fraud.

Friendly fraud is easier than ever before. Customers have way more anonymity when shopping online. With so many disputes flooding, you have your work cut out for you distinguishing between the good and the bad.

With this threat to revenue, how are you handling disputes and what is your success rate?

Who is handling your disputes?

In 2021, the majority of merchants managed their chargeback disputes internally, with only 6% using an external solution. And more merchant teams managed disputes alongside other fraud work than the previous year.

This is surprising considering the high risk of financial loss or even bankruptcy because of the surge in chargebacks during Covid. However, this could also be because the ecommerce boom saw an increase in fraud across the board.

When it comes to actually challenging disputes, our survey found that companies with an internal team focused only on dispute management were the most likely to challenge disputes. This could be because they have more time and resources to dedicate to this single task.

Could we see more merchants deferring to external solutions or building dedicated dispute management teams in 2022?

What success rates are you seeing?

In 2020, on average, companies challenged 37% of chargebacks, and were successful in 56% of challenges. In 2021, companies challenged 48% of disputes, and were successful in 66% of challenges. Challenge to success rate is similar YoY, but overall companies challenged more disputes in 2021.

Regardless of approach, chargeback dispute success rates were higher in 2021 than 2020 overall. This could be in part due to regulation changes. Visa updated their chargeback rules in October 2021 in response to mounting disputes.

Interestingly, internal teams managing disputes alongside other fraud work seem to have a higher challenge success rate. But this is likely because they have other priorities, so challenge less disputes than the dedicated teams, and will only challenge disputes they are sure to win.

How do payment methods impact success rates?

Merchants consistently see the most success when challenging credit and debit card disputes. Newer payment methods cause merchants the most trouble, as challenges on Google Pay and Klarna are most difficult to win. This is because customer payment information is obscured, so merchants often don’t have the evidence they need.

This is becoming increasingly frustrating for fraud teams as the popularity of BNPL and digital wallets are rising. Globally, the use of BNPL during Cyber Week jumped 29% YoY. And 32% of mobile wallet users now have three or more wallets on their smartphones, up from just 21% a year ago. So it’s important you adapt your strategy to keep on top of new payment trends.

Which industry has been the hardest hit?

Travel & Hospitality merchants are still reeling from the impact of Covid. And historic disputes levels have played a huge part in this. In the wake of the Covid-19 outbreak, travel plans were canceled across the world. In March 2020, more than twenty airlines canceled all flights. In 2021, 60 million people in the US canceled hotel reservations and event tickets. And in 2022, cancellations are now just par for the course.

How has this impacted dispute challenge and success rates? The results of our Travel & Hospitality report show that, of all industries, Travel & Hospitality merchants challenge the least disputes at 40%, and have the lowest success rate at 61%. Research suggests that this is because very few merchants can effectively identify friendly fraud due to lack of resources and expertise.

Additionally, this could be because of the huge influx in genuine disputes. Complicated refund policies steered many customers towards filing disputes, overwhelming dispute teams. Under extreme pressure, fraudulent disputes are more likely to slip through the net.

How can you better protect your business in 2022?

Getting your dispute strategy right can protect your revenue and reputation. Excellent customer service and a clear refund policy can help mediate any issues your customers might have. Additionally, fraud prevention tools can help prevent legitimate chargebacks as a result of actual fraudulent purchases.

For more information on fraud trends and strategy, read the full Online Merchant Survey 2022.

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