You’ve invested a lot of time, energy, and money into your marketing strategy. You conduct research, develop content, run ads, engage with customers, and identify KPIs to gauge the effectiveness of your efforts. The last thing you need is for it all to be undermined by preventable losses.
Here’s the ugly truth: if you don’t have a strategy in place to contend with the numerous potential drains on your profitability, you may see all that hard work and money go to waste. To illustrate, let’s look at the growing chargeback problem facing the online market.
1. Problems Caused by Chargebacks
A chargeback is a forced payment reversal facilitated by a cardholder’s issuing bank. If a cardholder contacts her bank and claims that a transaction was fraudulent, or that there was some other critical error in the process, the bank can overturn the sale on the cardholder’s behalf.
Chargebacks were introduced as a consumer protection mechanism to defend buyers against fraud. A chargeback is warranted if a transaction in question was unauthorized by the cardholder.
There are other reasons why a customer might claim a chargeback, too. For instance, if the goods purchased never arrive, or are not as described, the customer may be entitled to a chargeback.
You want to avoid these disputes at all costs, as each chargeback filed against you undermines your marketing efforts. With each case, you lose sales revenue and any merchandise or services already provided.
You’re also responsible for covering the chargeback fees accessed by the bank. If left unaddressed in the long term, chargebacks will lead to increased overhead and reputational damage, and may even jeopardize your business’s sustainability.
To make matters worse, the total cost of chargebacks could be significantly higher than you realize. Merchants lose more than $100 billion annually due to chargebacks when we account for the cost of false positives, margin compression, lost productivity, and other factors.
According to the LexisNexis 2019 True Cost of FraudSM study, merchants lose a total of $3.13 for every dollar in direct fraud losses. So, while the chargeback situation looks troubling at first glance…the truth is it's even worse than it looks.
2. 3 Fundamental Chargeback Sources
Fraud is not a monolithic problem with a “one-size-fits-all” solution. Protecting your business against the damage caused by chargebacks demands identifying disputes based on their sources. Banks issue reason codes along with every dispute case, but for reasons that will be clear in just a moment, you can’t rely on these indicators.
All chargebacks are rooted in one of three fundamental sources: merchant error, criminal fraud, and friendly fraud. Each demands a unique strategy to protect your bottom line.
A seemingly-minor policy or procedural oversight can cause big problems down the line. These small errors produce a significant share of chargebacks, and merchants are often too close to the source of the problem to identify it. For example, common chargeback triggers include:
- Confusing or misleading billing descriptors
- Ineffective or difficult-to-understand return policies
- Order fulfillment oversights
- Product descriptions that lack key details
When it comes to criminal fraud, bad actors employ a variety of tactics, including account takeover, identity theft, and affiliate schemes, just to name a few. The best approach to contend with this situation is a multilayer fraud strategy based on redundant and complimentary tools for fraud detection. For example, you should subject every transaction to:
- Address Verification Service (AVS)
- CVV Verification
- Proxy Piercing
- Device Fingerprinting
- Velocity Checks
When combined with a dynamic approach to risk scoring and machine learning technology, these tools offer a much clearer, more detailed impression of each transaction’s potential risk.
Preventing merchant error and criminal fraud chargebacks from undermining your efforts isn’t necessarily an easy or straightforward prospect.
How you deploy these strategies will depend on your unique needs based on product category, marketing strategy, customer base, location, and more. That said, it’s possible to minimize threats and protect your marketing budget with the right approach.
3. Friendly Fraud: A Post-Transactional Threat
What about that third chargeback source, though? How can you prevent friendly fraud chargebacks? The short answer: you can’t.
Friendly fraud occurs when a seemingly-legitimate buyer completes a purchase, then later demands a chargeback without a valid reason.
Friendly fraud is post-transactional, meaning it doesn’t show any signs of being fraud until after the transaction. As such, we can’t rely on reason codes to give a true impression of the situation, and we don’t have reliable tools to prevent friendly fraud like a typical criminal attack.
Common reasons why buyers commit friendly fraud include:
- Buyer’s Remorse: The customer completes a purchase, then regrets it. Maybe the buyer spent more than intended, or the circumstances under which she made the purchase changed.
- Disconnect Between Expectation and Reality: The buyer expects more from a purchase than was delivered. The disappointed buyer files a chargeback to recoup the funds.
- Family Fraud: Someone close to the cardholder, like a spouse or child, uses their information to complete a purchase. This is especially common with digital goods, like mobile games.
- Confusion: Many cardholders simply don’t understand the difference between a refund and a chargeback. They don’t know that the latter hurts merchants much more than a return.
- Convenience: For one reason or another, the buyer believes filing a chargeback will be faster or more convenient than requesting a refund through the proper channels.
The majority of chargebacks are potential cases of friendly fraud. And, given that friendly fraud attacks are likely to cost as much as $50 billion in direct losses this year alone, it’s not a matter you can really afford to ignore.
4. Fight Back Against Friendly Fraud
We already established that friendly fraud is a post-transactional threat. So, how do you stop it from siphoning off your revenue and diluting the effectiveness of your marketing strategy? The best approach is to prevent all the chargebacks you can, then fight the rest.
The process of disputing a chargeback and attempting to recover your money is called representment. You’re literally “re-presenting” the transaction to the bank, along with compelling evidence to refute an illegitimate claim and validate the original transaction.
Representment can be a very complicated and in-depth process, though, demanding lots of research and back-and-forth communication. It could take weeks or even months to resolve a dispute…and there’s no guarantee of success.
One possible solution is to seek outside help. A professional chargeback mitigation service can offer the tools and strategies necessary to deliver long-term, sustainable chargeback reduction. Of course, this approach won’t be the right option for every business.
If you’re looking to self-manage your disputes, you must first eliminate the possibility of chargebacks caused by criminal fraud or merchant error. After all, you don’t want to dispute chargebacks in cases in which a customer has a legitimate complaint. Once you isolate true friendly fraud, though, you should follow these steps for every dispute:
1. Build Your Case: You’ll need evidence to support your case. This will vary based on the customer’s claim; for instance, a copy of the sales receipt, tracking information, photos, and delivery confirmation may all help build your argument.
2. Create a Rebuttal Letter: Your rebuttal letter exists to give context for your evidence. This is your opportunity to present your argument in a clear, dispassionate, and professional manner (not to rant at the unfairness of it all).
3. Submit Your Documents: Remember that the representment process operates on a tight deadline. You only have a few days to get your materials together and submit it to your acquirer, who then forwards it along to the cardholder’s bank.
4. Be Careful: The bank might review your evidence and uphold the transaction…or they might reject it. If the latter happens, you need to decide whether you’ll try to escalate the situation to the card scheme, as this could entail much higher fees and penalties if you lose.
The market is changing fast. New innovations in marketing and commerce, including IoT devices, machine learning, digital currencies, and much more, will impact the market in unpredictable ways. The best approach is to be proactive wherever possible, both before and after a sale.
Otherwise, you could find yourself spending more on your marketing efforts, only to draw in fraud and abuse.
Author: Monica Eaton-Cardone
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