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September 15, 2022

Chargebacks – An introduction to what you need to know

Learn what a chargeback is, what damage it does to your company and how to prevent it.


A chargeback is when someone with a credit or debit card after an unrecognized charge on your statement makes a claim. by a cardholder, which is why it is called a chargeback.


At the time of the claim, the bank "counter-charges" the operation, notifying the business that made the sale to return the money, in order to return it to the person who owns the card.

Chargebacks are a mechanism to protect cardholders from charges made without their consent - a protection tool for online shoppers.


However, in the current context, it can become a way to receive fraud as businesses that transact online. It is a problem that affects the entire ecosystem equally, from entrepreneurs to financial institutions.

According to the 2020 report carried out by the CONDUSEF, chargebacks represented a total of 319,818,390 in purchases with debit cards, a figure that, when it comes to chargebacks generated by fraud, these have had to be absorbed by businesses.

In Mexico there is a high rate of chargebacks, between January and September 2020 the claims in chargebacks filed with CONDUSEF were 1,580, those filed directly with the banks amounted to 4,446,958 and in 88.8% of the cases the resolution was in favor of the buyer. That is, the business that processed the sale had to cover the chargeback. The amount claimed was $8,857 million pesos and 85 out of 100 were resolved in favor of the user.


REASONS WHY A CHARGEBACK IS REQUESTED


The first point to clarify is that not all chargebacks are made for the purpose of fraud. If, as a business, you received a request to return a sale from the bank, it was most likely for one of these reasons:


 

TYPE OF CHARGEBACK

-Unauthorized transaction: The purchase was not made by the user or was made without their consent.

       It is because you were a victim of fraud or a family member made the purchase without your        authorization

- Product or service other than described: the user received the product, but it does not match what was expected.

        This can be due to miscommunication in your product description or a misunderstanding on the part         of your customer.

- Unsuccessful Cancellation: The subscription or recurring charge was canceled and the charge was still made.

        It is usually a failure in the system that failed to process the payment cancellation in time.


- Purchase not received: the service or product purchased was not received.

       It may be a logistics problem or a failure in your company's system.


- Double charge: a double amount appears for the same transaction made to your business.

        This may be a direct error of the payment processor or the financial institution.


- Concept not recognized: the buyer does not recognize the concept of the transaction.

        The purchase made may not have been specified correctly or the user does not remember it.


As we have seen, it can be caused by various reasons such as confusion, bad return policies, a relative using the card of his or her father or mother without consent, or things like ambiguous descriptions in the account statement that the user receives.


In this case we can call it Friend Chargeback; The most frequent reason for this in Mexico is due to obsolete processes in the chain of trade payments. Similarly, some banks do not adapt to the needs of the modern market, since historically, payment systems were designed for physical points of sale, without taking into account the Internet paradigm.


Merchants with online transactions need sophisticated processes, such as being able to authorize a charge before making the payment: what is known in banks as the 'AUTH/CAP' or pre-authorization/capture protocol. Some card-issuing banks have difficulty supporting this flow and unify two processes into one, customers see two charges on their account and request a refund (chargeback) for thinking - rightly so - that they were double charged. Recovering money from this type of case is difficult, since it is practically impossible for banks to verify to the user where the error originates from.

WHEN DOES BUSINESS BECOME FRAUD?

The consumer makes a purchase with their card, receives the product or service, and then intentionally requests a refund through their card-issuing bank. In many cases, users first try to request a refund from the merchant's technical support team, arguing that they did not receive the product.


In the end, the consumer ends up keeping the purchase and receiving their money back, while the business suffers a financial loss up to five times the cost of the product.


This fraud is difficult to fight and unfortunately it is common in Latin America. It is carried out in different ways, the most common are when a person maliciously obtains the credentials (username and password) or bank card information; There are also card generators and security codes with which fraudsters generate true card data that the issuing bank eventually assigns to someone.

In all these cases, the original cardholder will see the charge on their account statement and, not recognizing it, will request a refund from their issuing bank. The best way to solve this is to avoid it, ideally with a specialized fraud prevention tool.


WHAT HAPPENS TO MY MERCHANT WHEN I RECEIVE A CHARGEBACK?

Chargebacks are difficult situations for everyone involved. This affects the financial process, since the company must cancel the order and absorb the costs.

The first thing you should do is find out why this chargeback occurred, preferably directly with the customer. It is possible that the client has forgotten the purchase or that he does not remember the name of the company; in this case it could be solved quickly and easily.


It may be the case that the user has regretted making the purchase, so you could choose to negotiate other alternatives such as discounts or change of product or service.

If you can't resolve this directly with the buyer, you'll need to start a chargeback dispute with the bank. You will be forced to work directly with the institution and provide the necessary information to determine if the dispute is valid. In the same way, you must abide by the procedures of the Association of Banks of Mexico.

A chargeback dispute generally takes 30 days to resolve, although the financial institution can take up to 75 days to make a final decision. The issuer will be the one who decides in your favor or in favor of the client. In the first case, the transaction will be charged to the client and you will recover the funds that meet the requirements. In the second, the client will receive a full refund that must come directly from your account or from your payment processor in case you have one.

Remember that a chargeback always calls into question the reputation of your business; This situation can put the company at risk by being classified as suspected of making fraudulent charges.


THE BEST DEFENSE IS PREVENTION.

Many times it is not possible to avoid them and, how we manage to see, act once they are made is quite complicated. It takes a lot of time, processes and in the end the resolution may not be favorable for you. So you lose money, reputation, time and your product or service.

It is best to prevent them; for this there are some actions you can take:

  • Maintain effective communication with your users and always be open to finding a solution.
  • Describe your product or service accurately and clearly.
  • Have a clear concept that appears in the account statements.
  • Keep all the documentation that supports the purchases made.
  • Request proof of delivery.
  • Provide clear information about payment plans
  • Opt for an anti-fraud system that protects your sales.

Given the reality experienced in our country, businesses must be aware of the risk of being victims of chargeback fraud. Finding anomalies in large amounts of data is a task for fraud prevention tools that use sophisticated data analysis techniques to identify anomalies in real time.

There are multiple tools to prevent fraud, however, not all of them are capable of being calibrated to the specific patterns of each region, type of product or specific company. It is important to select a suitable fraud prevention tool for each type of business so that its cost is reasonable and that it also does not generate "False Positives".

A strong anti-fraud system can help verify the information buyers provide before orders are approved. Bayonet helps e-commerce businesses identify anomalies in less than 200 milliseconds (the length of a human blink). Our team of experts works hand in hand with your team to calibrate and recalibrate our models in an agile way.


Schedule a demo to learn about the best prevention tool to protect your business.

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