The founder of Australian e-commerce jewellery store Desiderate Jewellery says fraudulent chargebacks are “killing” small businesses at a time when many are already hurting, with her family-owned business already losing $5,000 to chargebacks this year alone.
Chargebacks are defined by the Commonwealth Bank of Australia as “like a refund, where a transaction made on a debit or credit card is reversed”.
A chargeback usually occurs when a cardholder, or customer, disputes a payment because they believe it is invalid or unauthorised.
However, sometimes a chargeback can be fraudulent. Also known as friendly fraud, this is where someone makes a purchase and then requests a refund by declaring they have never received the items, or the goods are not as described on a business’s website.
Last Tuesday, Janine Leghissa, who founded her NSW-based online jewellery store Desiderate Jewellery in 2017 and also owns fashion brand Taleeta, revealed on LinkedIn that such chargebacks are “killing” her small business after they cost her over $1,000 the week prior.
She asked other e-commerce business owners how they were handling the issue.
“Customers claim they never received the parcel, then open up a chargeback with the bank,” she wrote.
“Then the bank refunds their money — but they have the product.
“One customer ordered an express post item, then cancelled the transaction after it had been posted. We frantically tried to contact Australia Post to not deliver the item, without luck.”
In the post, Leghissa said chargebacks cause immense damage to small businesses because these retailers lose both the payment and the product, are forced to cover postage and staff costs when dealing with the issue, and face potential fines by their bank or payment gateway.
“Big business may be able to absorb those costs, but for a small Aussie business it hurts,” she said.
According to a 2020 report by US-based global leader in financial services technology FIS Global, friendly fraud can account for as much as 70% of all credit card fraud and costs the industry over $132 billion a year.
This amount does not include the additional losses merchants absorb, such as the cost of the goods or services they refund.
Speaking to SmartCompany, Leghissa confirmed she has already lost at least $5,000 this year due to chargebacks.
“And that’s the product cost only,” she says.
“So that’s not including any of the other things like staff time and postage, that is purely product cost.”
Leghissa believes chargebacks are becoming more prevalent and this is linked to the current economic climate and “people doing it tough”.
“But possibly people are getting more savvy and finding better ways to shoplift,” she adds.
The costs of fraudulent chargebacks to small businesses are many, she explains.
“Financially, when a chargeback happens, we lose the revenue from the sale at more costs than on the sale price of the item,” she says.
“We get fined by the website platform, there’s postage costs and there is also the time we spend investigating the chargeback and gathering all the information in order to file an appeal.
“That involves pulling together all the transaction details, the communication records on emails and phone calls, and any other relevant documentation and proof of delivery.”
The financial liability is all on the business, Leghissa says.
“So the customer puts the chargeback in and the funds are withheld from the business, so we don’t get paid and we get a fine applied before we have a chance to appeal,” she says.
“Then we get a chance to put an appeal in, but often the appeal process is ineffective. We provide evidence and it’s frequently disregarded. The lack of accountability just undermines the whole process of doing an appeal.”
Small businesses, and the evidence they provide during this appeal process, need to be taken seriously, says the business owner.
“I think the system needs to be reassessed and I think a fair approach would involve already ensuring that appeals are reviewed properly and that the business’s evidence is taken into account,” she says.
“We are providing tracking numbers, proof of delivery, email threads often with the customer receipt, we have photos, a quality check, and the website descriptions. We’re putting all this information in there and providing screenshots.
“So you need to actually look at the appeal properly and if the business can provide indisputable proof that the correct item has been delivered and accurately described, well then the appeal should be upheld in favour of the business.”
Australian Retailers Association (ARA) CEO Paul Zahra said chargebacks, while designed as a consumer protection mechanism, can present challenges for businesses, particularly in terms of financial and operational strain.
“Whilst many chargebacks are legitimate, chargeback fraud remains a concern,” he tells SmartCompany.
“This happens when a customer, either intentionally or inadvertently, files a chargeback against a legitimate transaction instead of seeking a refund or resolution from the merchant.
“Chargebacks impact businesses because the funds from the transaction are placed on hold – disrupting cashflow.
“Businesses often also must pay fees for the chargeback to be investigated and processed.”
Zahra says it is particularly difficult for SMEs as the onus is on the retailer to prove the transaction was genuinely authorised by the cardholder, and the customer received the goods or services as described.
“Businesses should keep comprehensive records of transactions, including communications with customers,” he recommends.
“This can be invaluable in disputing unjustified chargebacks.
“They should also ensure that product descriptions and terms of service are clear and transparent to reduce misunderstandings and buyer’s remorse.
“Chargebacks protect consumers from fraudulent transactions and help maintain trust in online shopping. They also encourage businesses to maintain high standards of service and product quality.
“However, for businesses, chargebacks can be costly not only in terms of direct financial losses but also in administrative burdens. Disputing chargebacks often requires time and resources that small businesses might not have.”
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