Annual Chargeback Report & Statistics

Part 2

October 21, 2020

This is part 2 in a four-part series covering a year in chargebacks and its impact on merchant revenues for 2020. For access to other parts of the series, select from the following:

Part 1: Chargeback Ratio & Revenue Loss

Part 2: Reasons for Disputes & Win Rates + ROI

Part 3: Chargeback Lag Time & Monthly Trends

Part 4: High Risk Countries & Dispute Prevention

This report does not have to be read in order, so feel free to jump ahead to other topics that pique your interest.

Common Reasons for Chargeback Disputes

What prompts a chargeback? Why are cardholders and banks compelled to do so?

There are four primary categories that classify chargebacks, varying based on card brand

Fraud

Cardholder disputes

Authorization issues

Processing errors

Based on a cardholder’s case, the issuing bank picks the category best suited. Since 2018, fraud-related disputes have increased dramatically, accounting for the vast majority of chargebacks. Visa and Mastercard saw a 5.4% and 9% increase, respectively, over the three-year period. The second most common reason relates to cardholder disputes.

Both processing errors and authorization issues, third and fourth among categories, accounted for less than 1% of chargebacks, combined.

Visa Disputes

Mastercard Disputes

Why the sharp increase in fraud-related classifications? The system is inherently flawed. When a cardholder’s bank assigns a reason code to each chargeback, the coding is often based on limited knowledge

Often times, the bank choose recourse based on information provided by cardholders. If the process is initiated incorrectly—as is often the case in ‘friendly fraud’—the bank is using incorrect or inaccurate information to make dispute decisions.

Win Rates + ROI

Merchants, per card brand regulations, are allowed a timeframe in which to respond to invalid chargebacks.

Invalid chargebacks are defined as:

“an unnecessary or non-compliant payment dispute—a chargeback that shouldn’t have happened.”

In 2019, 77.25% of disputes classified as fraud actually constituted ‘friendly fraud.’

Although merchants are given the right to fight invalid disputes, research has shown that they have become increasingly difficult to win. The Visa Claims Resolution (VCR) initiative made sweeping changes to the compelling evidence requirements for reason code 10.4 (other fraud- card absent environment).

As a result, chargeback responses must contain evidence of cardholder verification (address verification services such as AVS, CVV2, and 3D Secure offer identity authentication). However, according to chargeback management service Midigator, “55% of merchants—who accounted for 82.7% of the transaction volume—chose not to use those tools because they were focused on providing the smooth and simple checkout process that today’s consumers demand.”

This has shown a drastic year-over year loss in merchant win rates against invalid fraud disputes:

Visa Win Rates- 2018 v. 2019

By comparison, Mastercard has not changed its compelling evidence requirements, meaning far greater win rates for merchants.

Win Rates- Mastercard v. Visa

This data, more than before, illustrates the necessity for verification tools in a merchant’s arsenal. Protecting revenue streams and ROI means investing in measures to fight invalid fraud claims.

When fighting chargebacks efficiently, merchants collected required compelling evidence and crafted customized responses, resulting in greater wins and a better outcome for their business’ success.

Use of Identity Verification Tools