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Understand Consumer Behaviour To Understand Chargebacks
A chargeback is a forced reversal of a payment initiated through a customer’s bank, and for merchants, it’s not just a financial inconvenience but a potentially devastating business problem. Mastercard estimates that each dispute can cost a financial institution from $9.08 to $10.32, not including the long-term reputational damage caused by high dispute rates.
However, at the root of every chargeback is a customer who filed the dispute. This makes it, as many things in life, a human issue. To truly reduce chargebacks, merchants need to understand the psychology behind them — the motivations, perceptions, and cognitive biases that influence a customer’s decision to contact their bank instead of the business.
Understanding what influences the decisions of consumer behaviour allows merchants to implement psychology-based chargeback prevention strategies.
Chargebacks from the Consumer Perspective
Chargebacks were created to protect the consumer when they use credit cards. It allows them to dispute transactions that may be unauthorised, fraudulent, linked to merchant error, or because the product or service they’ve received is not as described.
This mechanism built trust in card payments, giving customers confidence that they could reverse charges when necessary. Over time, however, the process has evolved into something broader. Customers now use chargebacks not only for fraud or mistakes but also to express dissatisfaction, reverse buyer’s remorse, or bypass a merchant’s refund process.
This shift has given rise to friendly fraud, where a customer disputes a legitimate charge either knowingly or unintentionally. In these cases, the chargeback becomes less about the original transaction and more about the customer’s emotional response. Whether it’s frustration, regret, or confusion, the driver is often psychological rather than purely factual.
5 Psychological Triggers Behind Chargebacks
Several well-established concepts in consumer psychology help explain why customers file chargebacks.
1. Cognitive Dissonance
When there is an incongruence between the expectation and reality of a product, customers experience cognitive dissonance, where they may become frustrated or anxious to get the money they spent.
To prevent this: Ensure your product has clear descriptions so customers are fully aware of what they are receiving. This can lower customer dissatisfaction and failed expectations.
2. Habitual Buying
This occurs when customers routinely buy the same products with little to no thought. While this does not directly lead to a dispute, it increases the risk as the high frequency of purchases and low involvement can lead to duplicate charges or forgetfulness concerning recurring payments, leading to multiple disputes.
To prevent this: Send follow-up emails/ receipts regarding purchases or subscriptions, allowing customers to review their purchases and ensuring you have a clear refund policy for accidental purchases.
3. Consumer Myopia
This refers to immediate gratification in consumption, where customers prioritize short-term gains and neglect the long-term consequences of the transaction. This often leads to friendly fraud as consumers choose the chargeback route, perhaps due to embarrassment or shame.
To prevent this: Make sure your refund policies are clear and accessible, allowing customers to contact you as the merchant before contacting their bank. Use fraud prevention tools such as ChargebackStop to detect and respond to repeat abuse patterns, and we can flag suspicious accounts, saving you time and money.
4. Loss Aversion
Pioneered by Kahneman and Tversky, this concept emphasises how a loss of money is more impactful than gaining money. Therefore, if customers feel they have overpaid or aren’t content with the value of their money, they may perceive it as a loss and rush to undo this.
To prevent this: Set unambiguous expectations of the product so customers understand what its value is, and send follow-up emails to reinforce the value. This helps align people’s loss of money with an equal gain in product.
5. Perceived Risk and Trust
When customers have low trust in a merchant or organisation, they are more likely to file a dispute straight away with the bank; they may assume there is less risk with the bank and will receive their money.
To prevent this: Offer efficient and accessible support services to increase trust and strengthen customer relations. Make sure your billing descriptors are recognisable and include your customer service number/email if possible.
Friendly Fraud: The Biggest Psychological Chargeback Category
Friendly fraud occurs when customers file a dispute against a valid chargeback, knowingly or unknowingly. In many instances, this is driven by psychological stressors such as entitlement to a refund after dissatisfaction with a product, embarrassment due to accidental purchases, and regret. Customers may face moral disengagement, whereby they feel as if their dispute isn’t stealing because the “victim” is an organisation and their chargeback is anonymous.
It is critical to understand the psychology behind friendly fraud because Ethoca estimates that it is costing the industry around £100 billion. Friendly fraud not only causes tremendous financial strain, costing merchants around £50 billion a year, but it also negatively impacts your business overall. There is also an operational loss due to the need to investigate and fight disputes. You lose trust with payment processors, banks, and worst of all, customers, which can lead to a vicious cycle of distrust and chargebacks.
Psychology-Based Prevention Strategies
Though we’ve tackled specific prevention tips earlier, they are summarised here as follows:
- Clear billing descriptors: Keeping bank statements clear helps prevent chargebacks, as friendly fraud is frequently caused by an unrecognised charge.
- Clear refund policies: Set transparent policies to reassure customers they have an official way for refunds, therefore reducing the urge to go directly to the bank.
- Detailed product description: Align the reality of the product with expectations. Accurately outline visuals and quality to decrease the number of disappointment-driven chargebacks.
- Empathetic, accessible, and efficient customer service: Customers are less likely to file a dispute when they feel understood and valued.
- Follow-up emails: Remind customers of purchases and reinforce the value of the product, allowing you to create strong customer relationships. This can reduce buyer’s remorse, a common reason for chargebacks.
- Track suspicious accounts and activity: Consistent monitoring can help you flag suspicious purchasing behaviour before it becomes a dispute, allowing you to respond quickly.
Keeping Chargebacks Low With Chargebackstop
The psychology behind chargebacks is important to understand. In an era of new and fast technology and ease of the payment process, humans have become more impatient; many see a chargeback as the quickest route, though it may not always be.
ChargebackStop utilises psychology-based strategies with real-time prevention tools to flag suspicious activity, preventing consumer myopia, and helps you communicate clearly with your customers, pre- and post-purchase. We manage your dispute rate so you don’t have to.
Book a free demo and see how ChargebackStop helps you stay one step ahead of disputes.
