In 2024, chargebacks remain a significant concern for businesses, financial institutions, and consumers. As digital transactions continue to grow, so do the complexities and challenges associated with managing chargebacks. This article examines the latest trends, challenges, and innovations shaping the chargeback landscape in 2024 and how, at payabl., we collaborate with Mastercard to help merchants prevent chargebacks.
Evolving Trends in Chargebacks
Increased Volume Due to E-commerce Boom:
The global e-commerce market continues to grow rapidly, driven by the convenience of online shopping. In 2023, the European e-commerce market grew by 8%, according to Ecomerce Europe. In Cyprus, e-commerce revenue is projected to reach €823.95 million in 2024 and is expected to grow at an annual rate of 9.21%, reaching €1,279.80 million by 2029.
However, according to data from Ethoca by Mastercard, almost one-quarter of eCommerce shoppers disputed at least one charge over the last 12 months. Among those who filed disputes during this period, 39% report filing more disputes since March 2020 than before. Consumers are disputing more charges now than before the pandemic, with 12% disputing at least one charge per month.
Service Errors and Customer Confusion
Service errors are the most common reasons eCommerce customers initiate a dispute. Seventy-one per cent of eCommerce shoppers disputing charges do so because of service errors such as shipping mistakes, billing mishaps, or late arrivals. Customer confusion is another prevalent reason, with 39% of those who dispute charges doing so due to misunderstandings about their orders. Legitimate fraud is the second-most common reason, with 27% disputing because of fraud attempts.
Rise of Friendly Fraud
Friendly fraud, where consumers dispute legitimate transactions by claiming they did not receive the product or service, has become increasingly prevalent. A report by Juniper Research indicates that friendly fraud is projected to account for over 40% of all e-commerce fraud by 2024. This trend is exacerbated by consumers becoming more aware and better educated about the chargeback process, using it to resolve genuine issues and sometimes to fraudulently reclaim funds.
Consider the example of a car rental company in Cyprus. Customers might dispute additional fees charged from their deposit for items such as damages, fines, or fuel expenses, leading to challenges for the rental company. Chargebacks in the car rental industry can account for a considerable percentage of transactions, with an average chargeback ratio of around 0.75%, according to Auto Rental News.
Regulatory Changes:
Regulatory bodies worldwide are revising guidelines to better protect consumers and streamline the chargeback process. A significant development is the European Union's new Payment Services Directive (PSD3), which aims to strengthen consumer protection and improve the transparency of payment services. PSD3 increases the emphasis on consumer rights, shifting the burden of proof more heavily on merchants to demonstrate the legitimacy of a transaction.
Challenges Faced by Businesses
Handling chargebacks can be costly for businesses. The process involves refunding the disputed amount and paying chargeback fees, which can be significant. The cost of chargebacks is expected to exceed €900 million by 2023, up from €621 million in 2020, according to an Ethoca-commissioned Aite Group study. The resources required to investigate and respond to chargebacks can strain smaller businesses, impacting profitability. Balancing fraud prevention with customer satisfaction is crucial to avoid false declines and brand damage.
Innovations in Chargeback Management
AI and Machine Learning:
Artificial Intelligence (AI) and machine learning (ML) are transforming chargeback management, especially in fraud detection. These technologies analyse transaction patterns, identify potential fraud, and predict chargeback risks with high accuracy. Companies using AI for fraud detection have seen a 30-50% reduction in fraudulent transactions, according to McKinsey. AI-driven solutions also automate the dispute resolution process, reducing the time and resources required to handle chargebacks.
Merchants looking to implement AI could turn to Mastercard, which leverages AI capabilities to enhance payment resiliency, detecting and preventing fraudulent activities in real time. This proactive approach helps identify suspicious transactions and mitigate chargeback risks before they impact merchants and financial institutions. Mastercard's AI-driven services have significantly reduced fraudulent transactions, thereby lowering the associated chargeback volume.
Enhanced Authentication Methods:
Enhanced authentication methods, like multi-factor authentication (MFA) and biometric verification, are increasingly standard to prevent fraudulent transactions. Gartner predicts a 25% annual growth in biometric authentication, leading to a significant decrease in fraudulent chargebacks. These technologies offer an extra layer of security, safeguarding consumers and businesses from unauthorised transactions.
Collaborative Efforts:
Industry collaboration is essential in the fight against chargeback fraud. Payment processors, banks, and merchants are increasingly working together to share data and best practices. Initiatives such as the Merchant Fraud Protection Network and chargeback alert systems enable real-time communication and coordinated responses to potential fraud.
An exemplary initiative is Mastercard's Collaboration Alerts. This service provides near real-time notifications of confirmed fraud and customer disputes, enabling merchants to resolve issues proactively before they escalate to chargebacks. By leveraging Mastercard Collaboration Alerts, businesses can significantly reduce chargeback rates, minimise financial losses, and enhance customer satisfaction.
Chargebacks in 2024 present a dynamic and challenging landscape for businesses and financial institutions. As digital transactions continue to grow, so do the complexities associated with managing chargebacks. However, innovations in AI, enhanced authentication methods, and collaborative efforts offer promising solutions to these challenges.
By working closely with partners like Mastercard, leveraging cutting-edge technologies, and fostering industry-wide collaboration, businesses can stay ahead of the evolving chargeback landscape, safeguarding their operations and enhancing customer satisfaction.