Chargebacks occur for a multitude of reasons. Customer behavior and fraud activity ebb and flow with the changing economic conditions. The wide range of possible chargeback factors makes fighting a payment dispute a challenging task.
But 2022 brought us even more volatility. Lingering supply-side issues from the pandemic resulted in a year of rising interest rates. The monetary action incited a sharp financial reversal that impacted industries around the globe. A recession now looms.
As a result, we can see some clear trends in 2022 that help explain the current state of chargebacks. And by inspecting the current payment industry, we can make some predictions for 2023.
The theme of 2022 involved tightening monetary policy. For merchants, that resulted in a reckoning for new payment methods, a rise in friendly fraud, and the renewed demand for chargeback mitigation tools that can handle the choppy economic conditions.
The pandemic ushered in an era of high growth in eCommerce, and novel payment technology flourished with access to cheap capital. Buy Now, Pay Later (BNPL) grew by almost 400 percent between 2019, and 2021, up from $34 billion to $120 billion in transaction value. Cryptocurrencies experienced a similar transaction value increase, with a 478 percent revenue change in 2020 to a total of $22 billion. Consumers rapidly shifted to new digital channels for purchases.
In turn, such rapid expansion involved some growing pains and a spike in chargebacks related to payment acceptance. According to Justt’s own research, only 32% of surveyed Americans stated they had no issues with their BNPL purchases, with 19% of all respondents having filed a chargeback. Another 25% of U.S. consumers filed a chargeback on a purchase made with crypto. And fraud related to card-not-present transactions now costs U.S. consumers over a reported 10 billion.
New payment methods are a boon to merchants. But 2022 also showed that they can complicate the chargeback process and contribute to increased payment disputes.
2022 also featured a 20% - 30% rise in friendly fraud. This is likely due to consumers who feel the financial squeeze as borrowing costs increase. Lack of capital can lead to buyer’s remorse or attempts to recoup potential losses via chargebacks.
In addition, new reports show that consumers are increasingly willing to weaponize chargebacks. Around 44% of U.S. consumers consider a chargeback a legitimate form of political pressure. 25% stated they filed a dispute because they disagreed with store values and not because of a problem with the store’s products or credit card authorization.
2022 set the scene for such an increase in consumer-friendly fraud. Discretionary spending intentions decreased by as much as 27% in October, and nearly half of Americans stated they are concerned about their savings. With such precarious economic conditions, it seems that as significant number of consumers will utilize convenient false claims to recoup money spent.
Lastly, 2022 featured strong headwinds in most markets. To battle inflation, the Federal Reserve had to implement strict monetary tightening. High borrowing costs exposed many industries that relied on cheap capital (BNPL, crypto).
As a result, merchants are rethinking chargeback management strategies. New software solutions have flourished. AI and innovative technologies are popular options as economic conditions change. Everyone is preparing for the recession—merchants are relying more and more on intelligent chargeback management tools to help recover revenues as profit margins shrink.
The end of the bull market and subsequent high borrowing costs will likely determine the outlook of chargebacks in 2023:
If 2022 resulted in an increase in friendly fraud, a global slowdown should bring even more of the same. Consumer confidence plummets in a recession as people pay off debt or hold onto earned income — the Consumer Confidence Index (CCI) has dropped far below the benchmark of 100. False claims will likely increase as consumers deal with job losses and a lack of disposable income.
While high-interest rates will continue to affect the debt-heavy business model of tourism, the travel industry is set to make a strong pandemic recovery. Chargebacks spiked as airlines grounded and entertainment options closed, but customer dispute volume should return to pre-pandemic levels as the business rebounds (global air travel has already returned to 73.7% of pre-crisis levels). The tourism industry made permanent changes to industry economics (safety standards, digital payment avenues, etc.), so a return to normal should bode well for total chargeback volume in 2023.
The Fed increased interest rates, and that policy hurt high-risk and growth-focused businesses. The crypto markets experienced solvency issues, and BNPL providers now face difficulties without access to cheap funding. Expect increased regulation in 2023 as the current economic conditions unveil consumer risk associated with such new industry players.
In response to the growth of chargebacks, VISA has created Compelling Evidence 3.0. The dispute program alters the type of evidence merchants must submit to fight false customer claims.
The updates will force merchants to adjust their approach toward any chargeback management strategies. It will also involve new technology demands, as a number of data elements about each transaction will now be required. If successful, the program could lead to significant changes in how the payment industry addresses the problem of chargebacks.
Compared to the previous years, 2022 brought about an abrupt pivot. After years of dovish monetary policy and cheap interest rates, inflation has forced the Federal Reserve to adopt a hawkish stance. The resulting shift in economic conditions will alter consumer behavior in 2023 and require redoubled chargeback mitigation efforts from merchants.
During a recession, effective chargeback management is a crucial factor for success. Costly disputes are far too damaging for industries strained by already tight profit margins. As you prepare for 2023, access to innovative tools and industry knowledge will be necessary to better protect and recover revenues.
Are you ready for 2023? Contact the team at Justt to see how you can better prepare your chargeback mitigation strategy in the upcoming new year.