How Cardholder Misconduct is Driving Up Costs for Consumers and Leading to Poorer Customer Experience

The recently published 2024 Chargeback Field Report surveyed nearly 300 retailers, from small businesses to enterprise merchants, about their experiences with payment disputes, also known as chargebacks.

Merchants face significant costs due to these disputes; in 2023 alone, sellers globally lost an estimated $117.46 billion to cardholder disputes. To make matters worse, a growing number of disputes result from first-party misuse of the chargeback process, or "friendly fraud." This can be any situation in which a cardholder disputes a transaction without having a valid reason to do so.

Merchants were asked to describe their concerns about first-party chargeback misuse as part of the survey. Seventy percent of those merchants described it as a "moderate" or "significant" concern.

There's a good reason for that apprehensiveness. Survey data also showed that 72% of merchants polled experienced an increase in friendly fraud cases over the last three years, with the average merchant reporting an 18% increase in the number of instances. About half of the merchants surveyed reported that the majority of the chargebacks filed against them involved friendly fraud.

Merchants pay the price for chargebacks... at least initially

Mastercard estimates that chargeback volumes will increase by 42% between 2023 and 2026. For merchants, this no doubt spells higher costs. From chargeback fees (that range from $20 to $100 per disputed transaction) and represented costs to lost revenue and unreturned merchandise, merchants are paying for cardholder misconduct in more ways than one.

There are more severe consequences, too. Retailers whose chargeback rates approach 1% of total transactions risk being subject to oversight and greater restrictions. There are steep penalties for non-compliance that can dramatically raise the cost of incurring chargebacks. If the situation deteriorates further, the merchant's processor may close their account or even blacklist them from the industry.

Merchants who wish to push back against invalid chargebacks can engage in the re-presentment process, but favorable outcomes are not guaranteed. The Chargeback Field Report shows that most chargebacks go unrepresented; merchants who challenge a dispute, meanwhile, win less than half the time and recover revenue in just 18% of instances. This means that merchants still overwhelmingly lose money to cardholder disputes.

While merchants bear the brunt of the costs, that doesn't mean consumers are getting off scot-free. When merchants see higher payment processing costs due to increasing cardholder misconduct, product prices could rise.

Merchants are forced to pass the costs of chargebacks onto consumers. Specifically, 32.5% of merchants surveyed in the Chargeback Field Report admitted raising their prices in response to cardholder disputes. In effect, all shoppers end up paying higher prices because some cardholders abuse the chargeback system.

Related: How to Fight Fraud and Chargebacks Should Regulation Fail

Chargeback costs are transitive

As we addressed above, one option is to simply pass costs onto consumers through higher prices. This aggravates existing concerns about inflation, which have dominated market news in recent years. That's just the start, though; there are other adverse consequences as well, including:

1. Adverse knock-on effects. Every dollar lost directly to fraud ultimately costs US merchants $2.89 in fees and other costs. Cardholder misconduct creates a vicious cycle; every invalid chargeback filed is a dispute that may need to be investigated by an issuer and re-presented by a merchant. The situation could also need to be arbitrated by the card network. In other words, just a small number of invalid chargebacks can balloon into significant price hikes for buyers.
2. Opportunity Costs. The more time merchants spend combating friendly fraud, the less time they have for other activities that could make a positive, tangible impact on buyer satisfaction. Research and development, customer service, and operational enhancements fall by the wayside. In other words, consumers lose out on what could have been a better customer experience had friendly fraud not been a concern.
3. Limitations on Payment Methods. The Chargeback Field Report further reveals that there is sometimes a difference between the payment methods consumers want to use and the types currently supported by merchants. Decoupling buyer and seller preferences arguably stem from merchants' fear of fraud; data from the study suggests that 60% of merchants feel offering more payment methods increases fraud risk.
4. Blacklisting. Merchants may blacklist consumers who frequently request refunds or file chargebacks. The ban, which may be permanent or for a set period, limits a consumer's ability to transact with a merchant. Nearly one-quarter of merchants have blacklisted customers in response to chargebacks. That said, blacklists aren't always accurate. Merchants may accidentally block legitimate consumers and prevent honest, would-be buyers from making purchases.

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Even banking could be more limited

Sellers aren't the only ones shifting the burden of chargebacks onto consumers. Banks see substantial losses each year resulting from write-offs, or disputes involving a low-dollar value transaction, and for which the bank simply reimburses the cardholder from their own funds. Plus, each chargeback filed must be reviewed and investigated, which also takes time and money.

Banks may increase their fees or tighten their credit policies in response to these costs. Both actions ultimately make things more difficult for individuals who seek access to affordable credit and banking services.

To reiterate, chargebacks are obviously expensive for sellers, but they're not costless for consumers either. From higher prices and reduced payment options to knock-on effects and opportunity costs, malicious cardholders who engage in foul play harm innocent consumers in many ways, both direct and indirect.