Fraudulent Use of Chargeback Rights

The mantra of many hotel owners striving to provide customers with excellent service is, “The customer is always right.” But what happens when the customer is wrong?

The hotel industry experiences one of the highest average chargeback ratios among all industries. A chargeback ratio is your total number of chargebacks compared to your total number of transactions. Across all industries, the average ratio is around 0.4 percent. For hotels and motels, the industry average is 1.1 percent.

Unfortunately, chargebacks will occur to anyone who accepts payment cards. Unlike other types of theft, chargeback fraud is increasingly hard to prove and prosecute. As a result, you’re left responsible for any fees or losses associated with chargeback fraud.

Delineating Chargeback Fraud, Friendly Fraud, and True Fraud
Chargeback fraud refers to an individual who legitimately purchases goods or services with their own credit card. Then later disputes the charges through his or her financial institution as a way to be refunded the amount charged. After receiving the dispute, the cardholder’s bank immediately issues a refund from the merchant by deducting them from the merchant’s next credit card settlement including any applicable chargeback fees.


Friendly fraud is very similar to chargeback fraud, but without any malicious intent on the part of the customer. The cardholder might have simply forgotten they made the purchase, a member of their family could have used the card to make a purchase, or the return policies might have been misunderstood.

Unlike chargeback fraud and friendly fraud, true fraud involves a person or party acquiring someone else’s personal information and using it for economic gain. Data breaches, card skimming, and account take-over are all methods used by fraudsters to get their hands on card information.

True fraud is prosecuted under various legislative measures and in most cases receives the maximum penalty—a felony and 15 years imprisonment. Chargeback fraud usually takes place with smaller dollar amounts and rarely receives attention from law enforcement officials because of its prevalence and difficulty involved with detection. This leads many businesses to simply ignore all chargebacks, writing them off as a cost of doing business.

Unfortunately, this results in the merchant losing out on a lot of revenue that’s rightfully their own. According to LexisNexis, 71 percent of chargebacks stem from chargeback fraud and friendly fraud, while just 29 percent come from true fraud. Furthermore, many of the chargebacks filed under true fraud reason codes aren’t really true fraud at all. Which gives them a very a high win rate, when a merchant actually responds to them.

Chargeback Responses and Reporting
Responding to chargebacks with comprehensive and compelling evidence has numerous benefits. Most importantly, the lost revenue that is recovered includes all friendly fraud and chargeback fraud. But as mentioned previously, most businesses, especially start-ups and smaller companies, ignore disputes submitted by cardholders and eat the cost of goods or services, processor chargeback fees, marketing acquisition costs, and any other associated fees.

In addition to recovered revenue, chargebacks are a great lagging indicator of business issues. Chargeback reason codes come in two main flavors, Fraud and Non Fraud (Product/Delivery Issues). Among those two main buckets are 151 different reason codes that help businesses understand where you’re having issues. Formal chargeback reporting and analytics will help you set-up KPIs and gain insights, thereby helping you complete your efforts and truly understand the scope of your situation. Tracking your win rate is of ultimate importance. Your win rate is the ultimate identifier of what was really true fraud, versus what was chargeback fraud or friendly fraud.

Preventing Chargebacks from Ever Occurring
The only way to stop chargebacks altogether is to stop accepting cards. But there are methods businesses can put into place aimed at decreasing the volume of chargebacks, including:

• An outstanding customer service policy.
• A return policy that understands and fulfills the needs of the customer.
• Detailed product descriptions, photographs, and reviews that set realistic expectations for the item.
• Easily-accessible tracking information and transparent shipping communication.
• A clear merchant descriptor with your phone number or website.

If you field just a handful of chargebacks per month, chargeback reporting and manual responses with formal internal response processes will provide valuable insights into your chargeback landscape. But, if you experience hundreds of chargebacks a month or plan to scale rapidly, you should consider automating the response process. Doing so allows the creation of a data warehouse that places all transactions in a single, easily accessible location that connects to templates for all chargeback reason codes, satisfying compelling evidence requirements, and streamlining the response process. Efficient use of time minimizes opportunity costs associated with managing chargebacks.

There’s a considerable amount of revenue available for recovery to those who are currently writing off chargebacks as a cost of doing business. You just completed the first step of awareness of the prevalence of chargeback fraud and friendly fraud. Now you can start to take charge of chargebacks and recover revenue.

About the Author
Scott Stone is chief marketing officer at Chargeback.

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