Chargebacks in 2023: What Do Merchants Need?

In terms of chargeback support, what do merchants need? The answer to that question varies, as every business faces its own unique problems. Moreover, the chargeback process is complex and ever-changing. That makes it hard to determine effective response strategies. 

To provide a greater understanding of merchant needs, Justt recently released a new report, 2023 Chargeback Pulse: Merchant Views on a Changing Industry. The report compiles survey data about U.S. and Canadian merchants' perspectives toward chargebacks. A look at current industry attitudes helps show the common problems merchants face and the support they need to overcome those obstacles.

Collected data highlighted several issues that merchants are fighting in 2023:

1)   Merchants are struggling with the evolution of chargebacks

The chargeback industry is undergoing a process of evolution. Regular rule updates and the pace of innovation within the payments ecosystem contribute to a state of change. That continual evolution makes it difficult for merchants to stay ahead of the curve.

Survey data supports this fact. Justt found that 17 percent of respondents had not heard of Visa Compelling Evidence rules. And only 33 percent stated that they fully understood the new submission requirements. Which is surprising, as the changes made by Visa significantly impact the nature of evidence submission. And yet, a significant cohort had little exposure to the update.

There is an indication that the industry lacks clarity in its communication. That can explain why 35 percent of merchants found it “extremely challenging” to keep up to date with credit card chargeback rules.

What do merchants need? Industry-wide knowledge support.

In response to such findings, the industry should invest in proactive communication. That may include regular insights into industry regulations, card network rules, and fraud trends. Or it could extend to data about how to use chargeback mitigation solutions. Merchants need transparent, accessible information to help adjust to a changing industry.

2)  Merchants are struggling to maintain a successful response strategy

Amidst the rapid changes within the chargeback industry, merchants are also feeling a profound resource strain. As the dispute process grows, managing each aspect within the chargeback cycle becomes more exhaustive. Gathering evidence, crafting responses, and submitting rebuttals are labor-intensive. 

Justt notes the impact of such resource strain, especially for organizations with tight margins. Only 25 percent of smaller companies (between $50 - $500 million in revenue) report a win rate above 51 percent. In comparison, 47 percent of large companies (above $500 million in revenue) note a win rate above 51 percent.

And there is a reason for such win rate differences: resource availability. Larger companies simply have the means to contest more chargebacks. Fifty percent of enterprises combat at least 30 percent of all chargebacks, while only 17 percent of smaller companies do the same. Additional resource support works, as merchants are better equipped to recover lost revenues.

Unfortunately, 42 percent of merchants feel they do not have the resources they need. And when asked about the most common resource shortfalls, lack of manpower (52 percent) and lack of budget (48 percent) are the primary reasons. 

What do merchants need? An optimized dispute process

Merchants need a streamlined dispute process. The more efficient the chargeback cycle, the less demand on resources. Accepting false claims should not become an inevitable cost of business, but some dispute teams simply don’t have the capability. 

That's why industry-wide efforts to minimize costs and reduce the chargeback burden will have positive long-term impacts. Consider the efficacy of post-transaction chargeback prevention systems. Sixty-eight percent of companies that use such systems report a chargeback ratio of less than 0.9 percent as compared to 59 percent for those who do not use such systems. And 40 percent of companies with prevention solutions earn a low ratio between 0 - 0.5 percent, compared to only 25 percent of those who don’t. 

Clearly, new tech and automation are excellent solutions for reducing the burden of chargebacks. Merchants need continued efforts toward such an optimized dispute process.

3)  Merchants are struggling with friendly fraud

Friendly fraud remains a primary challenge for merchants. Fifty-five percent of respondents from Dispute departments find identifying friendly fraud as “extremely challenging.” Fraud/Chargeback departments were more adamant, with 60 percent of respondents labeling friendly fraud discovery with the same severity.

Tellingly, nearly half of all departments estimated that less than 20 percent of chargebacks are due to friendly fraud. This conflicts with previously stated data stating that larger companies enjoy a win rate above 51 percent. Higher win-rate data depicts a much larger volume of false claims than assumed.

That shows the extent to which chargeback teams struggle with identifying friendly fraud. Justt notes several possible reasons why: conflicting definitions of friendly fraud, a lack of accurate data, and minimal resource investment. Regardless, merchants' own estimates of chargebacks due to friendly fraud remain undercounted, a testament to how much merchants struggle to define the reality of the problem.

What do merchants need? Collaboration support.

To defend against chargebacks, merchants are turning to collaboration. Sixty-two percent of those working in Dispute departments reported high levels of collaboration with Payments. And 67 percent noted a close working relationship with Customer Success/Customer Support. Mitigation teams are attempting to holistically address both sides of the chargeback process (customer-facing and internal payments operations). Pooled data and combined efforts make it easier to identify and prevent chargebacks.

Such collaboration appears to be working: Survey respondents noted that the greatest value of collaboration is the reduction of chargebacks (74 percent state it as the primary reason for having good relationships with other departments). In turn, the entire industry should support such efforts. The more access companies have to integrated tools, effective best practices, and shared data, the easier it will be to create cross-department collaboration. Advocacy for collaborative practices can help all merchants address the problem of identifying friendly fraud. 

Conclusion:

Understanding merchant attitudes helps uncover prominent issues that demand focus. As for the chargeback industry, Justt offers some clear takeaways in its report:

• The need for supportive collaboration within companies regarding the problem of friendly fraud
• The need for education investment in an ever-changing industry
• The need for a streamlined dispute process to help reduce the demand on resources

Action steps in these areas should help inform future chargeback response strategies into 2024.