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Chargeback fraud, often referred to as “friendly fraud,” is a growing problem for online merchants, particularly in the EU. As more customers move towards digital transactions, the risk of chargeback fraud increases. It occurs when a customer falsely disputes a legitimate transaction with their bank, claiming they didn’t authorize the payment. In many cases, the customer keeps the product or service, leaving the merchant with a financial loss and the hassle of handling chargeback claims.

For US and EU-based businesses, chargeback fraud is a significant concern. However, with the right solutions in place, like open banking-powered payment methods such as our open banking solution, businesses can eliminate the risks associated with chargebacks. In this article, we’ll explore chargeback fraud in the EU, how it impacts merchants, and how Pay by Bank and local payment methods can protect your business from chargeback fraud.

What is chargeback fraud?

Chargeback fraud is a process in which a customer claims they did not authorize a payment or did not receive the goods or services, and subsequently disputes the transaction with their bank or card issuer. In the EU, chargeback fraud can be costly for merchants, both financially and reputationally. When a chargeback occurs, the merchant loses the payment for the transaction, may incur additional fees, and could face penalties from payment processors.

Chargebacks often arise due to:

• Customer forgetfulness: A customer forgets about a purchase or doesn’t recognize the charge.
• Friendly fraud: A customer intentionally disputes a legitimate charge in order to obtain goods or services without paying.
• Non-receipt of goods: A customer falsely claims they didn’t receive a product, even if it was delivered.
• Subscription services: A customer disputes a recurring payment because they forgot to cancel a subscription.

In the EU, where cross-border transactions are common, managing chargebacks can be especially tricky, as each country may have different regulations and standards for handling chargeback disputes.

The impact of chargeback fraud on merchants

Chargeback fraud can have far-reaching consequences:

• Financial loss: Not only does the merchant lose the original transaction amount, but they may also incur chargeback fees.
• Increased processing fees: A high chargeback ratio can lead to higher processing fees, as payment processors may consider the business "high-risk."
• Account termination: If chargebacks exceed a certain threshold, merchants risk having their payment processing account suspended or terminated, making it difficult to accept payments.
• Damage to reputation: A high rate of chargebacks can harm a business’s relationship with banks, payment processors, and even customers, affecting future transactions.

Given these risks, it’s clear that EU merchants need effective solutions to prevent chargeback fraud and maintain healthy business operations.

How Pay by Bank eliminates chargebacks

One of the most powerful solutions for reducing chargeback fraud is using open banking technology like Pay by Bank. This is a payment method that leverages the European Union’s strong regulatory framework for Open Banking. By using Pay by Bank, merchants can bypass other payment methods where chargebacks occur, removing the potential for chargeback fraud entirely.

Here’s how Pay by Bank protects your business from chargebacks:

1. No chargebacks with open banking payments: Unlike credit card payments, where chargebacks are a standard option for consumers, it operates within the open banking framework. Payments made through our open banking solution are authorized directly by the customer’s bank, which makes chargebacks impossible. Once a payment is initiated and approved by the customer’s bank, the funds are transferred, and the transaction is considered final. This eliminates the potential for customers to dispute the transaction after the fact.
   
   
2. Stronger security and customer authentication: Pay by Bank has multi-factor authentication (MFA) directly through the customer’s bank. This means that the payment is verified in real-time, making fraudulent chargebacks virtually impossible. Since customers authenticate the transaction through their bank’s secure app, the chances of fraudulent claims or "friendly fraud" are significantly reduced.
   
   
3. Local payment methods for merchants: Not only does Pay by Bank offer this security but other EU payment methods such as iDEAL in the Netherlands, Bancontact in Belgium, and BLIK in Poland offer low to almost no chargebacks. By offering these localized payment methods, you cater to your customers' preferences, ensuring a smooth and secure transaction process. This boosts customer satisfaction while further reducing the risk of fraud.
   
   
4. Faster, more efficient payments: Open banking payments are processed faster than traditional methods, meaning you don’t have to wait long for funds to clear. With Pay by Bank, payments are instant, and since they are irreversible once authorized, merchants can rest assured that the funds will remain in their account.
   
   
5. Compliance with EU regulations: Our open banking solution is fully compliant with the EU’s PSD2 (Payment Services Directive 2), which ensures robust security standards for all payments. This regulation mandates strong customer authentication (SCA) for online payments, which adds an additional layer of protection against fraud.
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The role of local payment methods in preventing chargebacks

Offering local payment methods is a strategic move for merchants, as it aligns with consumer preferences and local banking infrastructure. When merchants offer payment methods like iDEAL, Sofort, and open banking, they not only improve the customer experience but also reduce the risk of chargebacks. Local payment methods are highly trusted and often provide additional security features that make chargebacks less likely.

Conclusion

Chargeback fraud is a serious problem for merchants, but with the right tools in place, businesses can protect themselves from this costly issue. By adopting Pay by Bank and other local payment methods, merchants can eliminate chargebacks entirely, providing a smoother and more secure payment experience for their customers. With the EU’s open banking regulations and our seamless payment experience businesses can reduce fraud, enhance security, and improve customer satisfaction.