The Dark Side of Shopping – The War against Fraud and Chargebacks (Part 1 of 2)

“Chargeback” is a notorious term in the world of commerce, especially online. On the one hand, as online consumers, it is a tool that helps us avoid unknown charges. On the other hand, for online merchants and service providers it is a nuisance, a drain on profits, and sometimes even a threat to the business’ existence.

At Plimus, we regularly conduct in-depth investigations into hundreds of purchases that are denied by the customers throughout thousands of merchants. We try to locate the reasons for this phenomenon as well as coming up with original ways to avoid it.

Firstly, here’s a concise recap before we get down to actual tips:

Customers who feel disappointed by their online purchase aren’t necessarily obligated to wait for a refund from the merchant in question. If they have decided, for some reason, to cancel and get back the money on their purchase, a simple phone call to their credit card company or the issuing bank will make sure that their money is reimbursed and the charge is cancelled.

Since not all customers are always correct, sometimes the law that was made to protect them can become a tool of exploitation in their hands, at the expense of the merchant. From the moment that the chargeback is communicated to the credit card company, the burden of proof is upon the merchant. The money has already been taken back from them; it now it is up to them to prove that the transaction was strictly valid, meaning that it was carried out in accordance with the customer’s request and delivered what was promised.

In the online world, this proof is much more difficult to deliver since the merchant doesn’t even have a document that the customer has signed as confirmation that their purchase was delivered (this is why online transactions are called “absent purchases,” because the customer is absent from the position of the buying party).

So why are customers (or banks) initiating chargebacks?

1. The transaction was executed with stolen/lost payment details – classic fraud.
2. The customer decides to deny the charge due to buyer’s regret – known as “friendly fraud.”
3. The customer fails to link the description of the transaction on his credit card statement either to the store where they made the purchase, or to the actual product purchased.
4. The customer decides to initiate a chargeback because they haven’t received the product, or because they weren’t satisfied with the service and they haven’t been able to contact the merchant in order to solve the problem.
5. The customer requested a refund from the merchant and was denied.

Unlike a refund, in which the merchants initiate the action and have control over it, the chargeback is an action initiated by the customer or by the bank. The result seems to be identical – the money is returned to the customer, but in fact the chargeback has much more severe risks and consequences.

Read part 2 of 2 here

Hanan Sherkin,

Risk & Compliance Officer