Dec 9, 2022 - Economy

Credit card charge disputes on the rise as consumers cheat businesses

A credit card machine catching on fire

Illustration: Lazaro Gamio/Axios

Consumers are cheating businesses out of payments at increasing rates by fraudulently disputing credit card charges that they genuinely made.

Driving the news: Incidents of "friendly fraud" are up anywhere from 20% to 30% in 2022 depending on the market, Visa chief risk officer Paul Fabara tells Axios.

Why it matters: Businesses are already dealing with a slew of challenges as inflation, wage increases and labor shortages undermine the bottom line.

  • If they can't prove that transactions are legitimate when a customer disputes them, they'll be forced to cover the cost.

Details: "Friendly fraud" includes an array of situations in which a customer improperly disputes a charge on their credit card bill, including when they:

  • Forgot about a purchase or don't recognize the name of the merchant on their bill.
  • Don't realize that a friend or family member used their card to buy something.
  • Intentionally spend money with the intent of disputing the charge after the fact.

The big picture: It's not entirely clear why credit card disputes are rising, particularly because they had been falling for a few years after the rollout of chip cards.

  • But the pandemic appears to have been a catalyst, as restaurant chargebacks have grown from 1 in 400 transactions to 1 in 100 since it began, according to financial consulting firm Chargebacks911.

Between the lines: Growing awareness of the fact that disputing a charge can be a way to escape financial responsibility for the payment may be a factor.

  • Another possibility is a turn in the economic tide: Credit card disputes tend to increase when people's financial situations deteriorate, Fabara says.

Threat level: "Netflix, alcohol, Uber charges, DoorDash charges — those are generally the ones that make up the majority of this category," Fabara says.

  • "It's brutal," Chicago restauranteur Louie Alexakis told Crain's Chicago, saying his 5 Avli locations have experienced a 30% increase in disputes costing them thousands a month.
  • "The amount of chargebacks that we get and the time that is spent and the training that we've had to give our staff . . . that has gone up dramatically."

Yes, but: Fabara says Visa is equipping merchants with the tools to fight back, which he believes is going to reduce the number of friendly fraud claims in the future.

  • Merchants currently win about 40% of the time they fight credit card chargebacks requested by customers, according to Equifax division Midigator.
  • "We’ve been working really, really, really hard ... to make sure the name of the merchant on the record is [recognizable] and represents the business you’re in and the customer can recognize where the transaction is coming from," Fabara says.

Meanwhile, Visa is also ensuring that restaurants follow its transaction protocols — such as ensuring that the card is valid and that the amount is correct — so that they can prove that the purchase was legitimate, Fabara says.

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