As many of you know, I’ve been hootin and hawlerin about this term called “chargeback” or simply… stealing shit from my company with be punishable by my Raptor plowing into your front living room. Now that I’ve gotten the childish comment out of the way, we’ll dive into the subjects that make up a chargeback. This info can be applied to any business, but I wanted to share my perspective as a small business owner in the aftermarket automotive community. Chargebacks can destroy a business’s cash flow, and worse, if the customer received the product, you, as the seller/vendor, spent that money for the customer. Yes, that is actual theft, and sadly, most “friendly fraud” chargebacks go unpunished…. but I think I can make a difference in this post.
Here are the chargeback subjects I will cover, along with many real-life examples of what happened to me.
- What is a chargeback, and why do chargebacks happen?
- What type of chargebacks are there?
- Who allowed chargebacks?
- What the consequences of chargebacks
- What can I do to prevent chargebacks
- What needs to be done chargebacks moving forward in 2024
What is a chargeback, and why do chargebacks happen?
The word chargeback to a retailer/vendor might be the worst thing that could brought up in a meeting or an accounting department. A chargeback is when a customer (YOU), or even myself, initiates a “dispute” against the vendor or retailer (me) or anyone that you purchased from, FFP, American Muscle, or CJ Pony Parts; you get the point. You or someone else would file a chargeback because you didn’t receive a product on time. The vendor did not attempt to assist you with the order, the item was broken, and the vendor did not help you, or the order was genuinely fraudulent, meaning someone stole your credit card and purchased something you did not authorize.
Personally, I have filed ONE chargeback in my entire life. I had purchased a cylinder bore camera and had not received any updates for 2 months. I tried contacting the vendor for weeks and finally gave up. Ironically, they answered the email the day I filed the chargeback, and I repaid my invoice.
What type of chargebacks are there?
We have dealt with two types of chargebacks: fraudulent chargebacks and friendly fraud chargebacks.
Types of chargebacks
- Merchant error chargebacks
- Chargeback fraud
- Friendly fraud
Merchant Error Chargebacks
Merchant error chargebacks occur when businesses make mistakes during the transaction process, leading cardholders to dispute the charges. These errors can stem from various sources, including human oversight or technical glitches. The business is accountable for these mishaps, so cardholders initiate chargebacks to correct the discrepancies.
Illustrative instances of business error chargebacks include:
- Duplicate Charges: Occurs when businesses inadvertently process the same transaction multiple times, resulting in the customer being billed excessively.
Example: A customer experiences an error while completing an online purchase, leading them to attempt the transaction again, resulting in multiple charges for the same item.
- Incorrect Amount Charged: Arises when businesses charge an incorrect amount for a transaction, whether due to pricing or typographical mistakes.
Example: A customer agrees to a $50 purchase, but the business bills them $500 due to an error. The customer then seeks a chargeback to rectify the overcharge.
- Noncompliance with Card Network Regulations: Results from businesses failing to adhere to the rules set forth by card networks like Visa and Mastercard, such as obtaining proper authorization or adhering to refund procedures.
Example: A business charges a customer’s account without obtaining proper authorization, prompting the cardholder to initiate a chargeback upon discovering the unauthorized transaction.
Chargeback Fraud – This is truly the worst, the worst.
Chargeback fraud arises when an unauthorized party conducts transactions on a cardholder’s account without their knowledge or consent, typically due to compromised account information. In such instances, the cardholder is not accountable for the fraudulent charges and can request a chargeback to recover their funds. Here are several scenarios illustrating chargeback fraud:
- Stolen Card: This occurs when a thief steals a cardholder’s physical card and uses it for unauthorized purchases, prompting the cardholder to report the theft and initiate a chargeback.
Example: An individual’s credit card wallet is stolen, and the thief utilizes the card to make purchases. Upon discovering the theft and unauthorized charges, the cardholder contacts their issuer to report the incident and initiate a chargeback to reverse the fraudulent transactions.
- Account Hacking: This involves fraudulent actors obtaining a cardholder’s account details through hacking or phishing tactics, enabling them to make unauthorized transactions. The cardholder can dispute these charges through a chargeback.
Example: A cardholder unknowingly provides account information to a fraudulent actor through a phishing scam, leading to unauthorized online purchases. Upon detecting the fraudulent activity, the cardholder notifies the issuer, who assists in initiating a chargeback to reverse the unauthorized charges.
- Counterfeit Cards: Fraudulent parties fabricate counterfeit cards using stolen account information to make unauthorized purchases. Legitimate cardholders can dispute these transactions through chargebacks.
Example: A fraudulent actor creates a counterfeit card with stolen account details and uses it for purchases. Upon detecting unauthorized charges, the cardholder informs their issuer and initiates a chargeback to challenge the fraudulent transactions.
This was a massive problem for us during 2021 and well into 2023. I genuinely blame our payment processors, WePay Chase and Authorized.net, for not having 3DS security. In the fiscal year 2023, we had over $60,000 in fraudulent chargeback orders. We experienced this same problem with Stripe back in 2020, which is why we moved away from them. Fast forward to the present time, we went back to Stripe as their “Radar” anti-fraud technology has emerged as an industry-leading tool built into their payment processor. I also like that Stripe is their own issuing bank, API/gateway, back-end software, and processor. A traditional processor will require the processor itself and a payment gateway to facilitate the transfer of funds between the issuing bank, your processor, and your bank account. The only downfall to the prosumer products such as Stripe, Square, Checkout.com, and other household names is that their processing rates can be expensive if you are a new sign-up. We’re lucky to have grandfathered rates that were pre-COVID. A traditional payment processor can offer a more competitive rate and better customer service in the long run. Still, their backend will never match the power of these new silicone valley start-up companies.
The number 1 issue with fraudulent chargebacks is that you will ALWAYS lose them. It is a 99% win rate for the customer that filed the chargeback… why you may ask, simply because it is fraud. Someone stole a credit card to make a purchase, and you, as the vendors, are on the hook. The credit card companies are telling you that you should have done your due diligence on fraud prevention as they’re not liable for the charge at the end of the day.
Here is an excellent example of what happened to us. Many of you may know this chargeback as it went viral on Facebook. We sold a FI Exhaust 2018-2021 Lamborghini Urus Cat-Back Valvetronic Exhaust to “Demis Miller” in Chicago. For some reason, no one did any due diligence on this purchase as we had never experienced fraud on this level. As soon as the exhaust was delivered, the customer filed a chargeback as a stolen credit card was used. If we had done 2 seconds of due diligence, it would have revealed that the address was in a horrible area of Chicago. Using a few brain cells, no one will have or own a Lamborghini Urus in that area. If you do not know what a Lamborghini Urus is, the SUV can cost upwards of $380,000+. What does that mean for us? We’re out the money we paid for the exhaust, the freight fee, and the worst part, a massive strike on our payment processing account.
Friendly Fraud – My Favorite One
Friendly fraud, also referred to as chargeback fraud or first-party fraud, occurs when a cardholder instigates a chargeback for a valid transaction, either deliberately or due to a misunderstanding or disagreement. Unlike actual fraud chargebacks, friendly fraud involves the cardholder initiating the chargeback, often without substantial justification. Here are several scenarios illustrating friendly fraud:
- Buyer’s Remorse: In this situation, a cardholder makes a purchase but subsequently regrets it or decides against keeping the product or service. Instead of adhering to the business’s established return or refund procedures, the cardholder initiates a chargeback, even if the purchase was legitimate and the product or service was satisfactory.
Example: A cardholder purchases a high-value electronic device but has a change of heart shortly afterward. Instead of following the designated return process, they dispute the charge and commence a chargeback to secure a refund.
- Unauthorized Family Member: Friendly fraud may occur when a family member or authorized user on the cardholder’s account purchases without the cardholder’s explicit consent or awareness. In such instances, the cardholder disputes the charge, asserting they did not authorize the transaction.
Example: A cardholder’s adolescent child, who holds authorized user status on the account, conducts a purchase without prior authorization. Upon noticing the charge on their statement, the cardholder disputes it via a chargeback, alleging that they did not authorize the transaction.
