Why Defining a Chargeback’s Root Cause Matters


Shelli Garcia

Risk & Compliance

April 27, 2022

April 27, 2022

April 27, 2022

Chargebacks represent missed opportunities to meet the consumers’ expectations. In the case of true fraud, you and your customer are both victims, but they’re likely to expect you should have known someone else was using their card. If the chargeback is for non-fraud reasons, the customer opens a dispute with the issuer to get their money back, but you rarely know what expectation you didn’t meet that led to the dispute in the first place. Unfortunately, some customers expect you to just take the loss and not question or verify their disputes.

As previously defined in our Why Did I Get This Chargeback blog post, card associations group reason codes into categories as a way of defining root cause; these codes are assigned based on the issuer's interpretation of the customer’s description, however, and they’re not always accurate. Including a root cause analysis step in your chargeback review process will help you assign your own "reason for dispute" definitions and gain insight into what’s driving disputes, where to focus your resources to make changes, and which customers are threatening your bottom line.

Chargebacks in the Authorizations and Processing categories are collectively considered “merchant error” and should make up less than 5% of your total chargebacks. These indicate a technical or operational exception that your business was not expecting. These may have been temporary issues or bugs, but if you see these month over month at the same ratio to sales based on transaction date, you can assume the trend will continue. If they fluctuate, it is likely something that has been corrected. 

From here, defining the root cause gets harder, and harder still is knowing which customers you can trust, which ones you can’t, and why.

There have been several surveys of consumers and merchants that reveal an increasing occurrence of chargebacks which are not true claims. Referred to as friendly fraud, 1st party fraud, or chargeback fraud, these chargebacks are cardholder-initiated and represent consumers who are either confused, opportunistic, or willfully deceitful and complicit in issuing a chargeback on a legitimate transaction. 

The Many Faces of Friendly Fraud

Friendly fraud can take many different forms:

  • Buyer’s remorse — The customer is the owner of the card used for the sale, but they want their money back and the terms and conditions of the sale do not allow for a refund

  • Frustration — A customer may make a purchase that allows for a refund, but the process to cancel a transaction is too hard, so they claim fraud

  • Speculation - An entrepreneurial customer buys on speculation of being able to resell an item, but they can’t find a buyer, so they claim fraud 

  • Return fraud - The customer returns something other than the item purchased (e.g. an empty box, other merchandise, and I heard one merchant got a potato!)

  • False claims - A customer claims fraud in order to get the merchandise/service for nothing or they open a non-fraud dispute for merchandise-not-received (this can be for personal gain or resale)

  • Accidental fraud - A customer requests information, documentation, or assistance on a charge (e.g. receipt requests), but their request doesn’t fit an option in the issuers app, online tool, or agent description, so the issuer interprets that to mean the customer didn’t authorize the transaction 

  • Familiar fraud - The cardholder is not the consumer—someone they know well (such as the cardholder's significant other, child, or good friend) used their card; keep in mind, when the cardholder extends permission or access to another party, this is not true fraud because the customer provided expressed or implied authorization

According to the results of the NRC's 2021 Global Fraud Survey, friendly fraud was especially problematic for merchants in North America and APAC, where responses indicated rates rose by 9% and 16%, respectively, compared to 2019. The report also found that friendly fraud is considered the most prevalent form of fraud, regardless of business size or region. In another online survey, 42% of consumer respondents who filed disputes did so due to unauthorized purchases made with their payment information. When asked separately, 17% of those who have filed chargebacks admitted to filing a fraud dispute for a transaction that wasn’t actually fraudulent. 

Chargeback reversals rates are “wins” divided by all chargebacks received.  While some of these reversals may be friendly fraud, merchants should be careful not to apply this rate as a friendly fraud rate since it could include reversals that were not the fault of the customer. If you “win” a non-fraud chargeback, you may have lost customer trust and loyalty in the process if the reason the customer resorted to the dispute is due to:

  • Unsupported transaction information or details 

  • Incorrect or improper descriptions of sales or refunds

  • Their overall dissatisfaction with your product or service (or delivery of the goods or services) 

If you win a fraud chargeback, you might be tempted to consider this “friendly fraud,” but fraud disputes can be reversed for other reasons, for example:

  • If you already refunded the transaction, but it wasn’t properly tied to the sales transaction ID

  • If there were missing details in the settlement files that failed to identify that 3DS or authorizations were secured 

There is no data-driven way from issuer-defined chargeback codes or referral activity to define friendly fraud without merchant investigation. 

The card brands place merchants on warning if dispute levels are too high and are left unmanaged. In the final blog in this chargeback series, we’ll provide more detail about these warning programs and how they are calculated, and we’ll share advice on actions merchants can take to manage additional risks and losses.

For more information on chargebacks and the entire payments ecosystem head over to the Pagos Product Documentation.

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