For recurring merchants who don’t have a strategic chargeback management strategy in place, not preparing for the rising costs of chargebacks will likely cost them big - and the costs are only going to get worse.
But there are ways to get ahead of the game and prevent future chargeback losses from occurring.
Chargebacks occur when a cardholder disputes a merchant charge, resulting in a debit to the retailer’s account. Regardless of whether the chargeback is successful or not, the merchant is charged a fee by the issuing bank. Merchants with a high ratio of chargebacks to transactions may also receive additional fines and run the risk of losing their payment processing privileges altogether.
Chargebacks are a problem for any merchant, but they can be particularly troublesome for recurring merchants. A recurring merchant is one that offers goods or services through a subscription model. Examples include Dollar Shave Club, Stitch Fix, SaaS (News - Alert) companies, fitness club memberships, lawn care services, etc. A cardholder authorizes the merchant to charge his or her account on a recurring basis. While recurring transactions add speed and convenience, this way of doing business can be susceptible to chargebacks if, for instance, a cardholder doesn’t realize they will be charged on a regular basis unless they opt out, or if they thought they cancelled their subscription and are charged again.
The bottom line is that chargebacks are costing your recurring business many thousands or millions of dollars each month. How much of your revenue is at risk and are you doing everything you can to claim your rightful share?
How Chargebacks Originate
While the chargeback mechanism was created to protect consumers against fraudulent behavior, some consumers have found that it is easy to dispute legitimate charges. This form of friendly fraud creates a significant financial burden for merchants.
Chargebacks come in many forms and impact merchants of all sizes. Whether it be actual fraud (unauthorized transaction takes place) or friendly fraud (customer makes a purchase and then requests a chargeback, even though they have received the goods/services they purchased), chargebacks bring about plenty of pain and more friction for the consumer relationship. Chargebacks can also originate when a customer returns an item but the refund was never posted to their account, when a customer pays for an item they never received, because of technical issues, or when a transaction requested to be canceled was not.
This all comes back to one major pain point in the current chargeback process: the lack of communication and data made available during the transaction lifecycle.
Where it Begins
Traditionally, purchasing data is left in merchants’ systems, leaving the issuer little choice other than to issue as fraud or a chargeback. Because there often isn’t enough data sharing between the merchant, issuer and the cardholder, the process becomes more confusing, costly and convoluted. That creates extra, and often unnecessary, friction for those involved in the process.
Beyond that, as many as 86 percent of cardholders will call the issuer and bypass the merchant entirely to dispute a charge. This leaves the resolution left in the issuer’s hands and leaves little for the merchant to do. What this then leads to, by default, is lost revenue and lost customers, which can hurt brand reputation.
Merchants don’t have the opportunity to address cardholder issues directly and issuers don’t have the information they need to resolve confusion, so the merchant is stuck in a race to the refund. When merchants receive a chargeback notice, it is often too late to salvage the customer or resolve the issue. Less-than-efficient dispute resolution procedures can hurt cardholder satisfaction, damaging the merchant’s brand and contributing to lost customers and profit leakage. This has a trickle-down effect on merchants, who typically do not come out on top of disputes.
This could be avoided by providing specific order details to those parties to help resolve disputes before they become costly chargebacks (device used to make the purchase, a complete description of the product/service, location of the purchase, prior dispute history, etc.). Those order details would generate compelling evidence to support the legitimacy of the sale and reduce profit leakage and “double dipping,” or acquiring a second refund from the merchant who might not have otherwise known any better. With real-time visibility on the customer outcome, this can help resolve disputes faster. This also enables real-time collaboration between merchants and issuers to manage the chargeback process. With the proper data available, those pain points and friction between parties can be avoided, leaving less chance that a purchase is flagged as fraud when in fact it was a legitimate purchase.
Bottom line: When more data is available to more parties, understanding how and why a chargeback originated and if it is legitimate is far easier to determine.
The Collaborative Advantage
By facilitating collaboration amongst the customer, merchant and issuer, the major pain points on each side of the transaction lifecycle can be better addressed in a way that benefits each party involved - faster, cheaper and more effectively. By providing the cardholder and issuer with more detailed purchasing information from the merchant it decreases the chance a customer would file an accidental chargeback - which is one of the major reasons fraudulent chargebacks (friendly fraud) are filed. With better ability to identify and reduce fraud, friendly fraud and chargebacks, cardholder, merchant and issuer collaboration is enhanced and enables purchase details to be shared with the cardholder upon inquiry.
And the benefits trickle down from there, which include: avoiding unnecessary chargeback fees, reduced fines and operational drain researching/resolving disputes that could have been addressed without escalation; faster access to compelling evidence requirements with the issuer to prevent disputes from becoming a chargeback; and finally, removing cardholder confusion by reminding them of purchase details on the first call.
Other benefits include:
Understanding the Numbers
Card-not-present (CNP) fraud will cost merchants roughly $6.4 billion by 2018. Collectively, friendly fraud costs both CNP and card-present retailers roughly $12 billion every year. And that problem is predicted to get worse. It’s estimated that CNP fraud losses alone will reach $7.2 billion by 2020.
Friendly fraud is the most pervasive form of online fraud and occurs when a consumer makes a legitimate purchase, receives the goods or services and then notifies the issuing bank they did not authorize the charge. There are many reasons consumers engage in friendly fraud—some use chargebacks as a form of shoplifting, others claim they never received goods or services because of buyer’s remorse.
The most common reasons for chargebacks for recurring merchants include:
The Hidden Cost of Chargebacks
Chargebacks and friendly fraud have other costs as well. LexisNexis (News - Alert) reports that merchants pay $3.08 for every $1 lost in fraudulent transactions. These transaction types include fraud committed by consumers who “game” the system due to buyer’s remorse (friendly fraud) or criminals looking to steal from the merchant.
When a chargeback happens, the merchant is accountable, regardless of the verification steps taken during the order process, and regardless of whether or not the customer received the goods
From manual processing, reconciliation and reporting to interacting with various issuing banks, these loss factors take many forms and are not always evident on the balance sheet. For example...
Understanding the Dispute Resolution Process
While chargebacks cannot be entirely eliminated, they can be managed effectively. The chargeback process allows recurring merchants to dispute and represent chargebacks they believe are fraudulent or inappropriate by presenting compelling evidence to the issuing bank that proves the chargeback should be reversed.
One of two things may happen upon representing the dispute. In the case of Visa, if no resolution is forthcoming, the issuer can request Pre-Arbitration or Arbitration, where a case is filed with the association by the Issuer. In the case of MasterCard (News - Alert), the issuer may initiate a second chargeback. If there is no resolution, the acquirer may initiate Pre-Arbitration or Arbitration where a case is filed with the association by the Acquirer.
All Chargebacks are Not Equal
While all chargebacks can, in theory, be contested, not all of them should be. On average, merchants represent about 56 percent of their fraud-coded chargebacks, and almost 30 percent represent all their chargebacks. When considering whether or not to represent, it is important to analyze each business case. Looking at the representment fee versus the return on fighting and winning a chargeback can aid merchants in determining whether it is worth it in the long run. Other things to take into consideration include business and order processes and whether or not the merchant is part of a high-risk market.
Removing Unwarranted Chargebacks
The key to identifying where chargeback problems occur and how to better prevent them is to understand what solutions are needed in order to better resolve disputes. Aggressively preventing chargebacks from occurring and recovering funds lost to chargebacks should be a priority for every merchant. And if you aren’t actively preventing them, they will cost you. That means having the ability to address unwarranted chargebacks up front.
With the support of full chargeback management solutions to stop both fraud and non-fraud chargebacks from occurring, merchants are better equipped to reclaim unwarranted chargeback losses. This is why having a chargeback management strategy in place really matters during the entire process (resolving, presenting and recovering chargebacks).
Making the Case for Representment
Once the concept of unwarranted chargebacks is addressed, the process becomes easier to make the case for representment, particularly when preventing future occurrences. The odds of winning disputes increase when a merchant has solid evidence to help its case. This type of evidence may—and should—include the following:
It should be noted that there is often a short time frame to dispute chargebacks. If and when sufficient evidence is submitted, the issuer may reverse a chargeback and the merchant will be refunded, though it will still incur the chargeback fee for processing by VISA/MC. If the merchant cannot successfully represent the chargeback, they can elect arbitration, which will result in additional fees.
During the process, it is important to know and understand representment rights. Below is a list of steps a merchant must take for cases in which chargebacks are associated with the use of the Address Verification Service (AVS) and the Card Security Codes (CVV2, CVC 2, CID) in order to be represented by a processing bank.
The rules are complex and ever changing, so staying on top of this and using the appropriate resources is important, but it can be time consuming.
Process Improvement is Mandatory
There are a number of steps merchants can take to decrease chargebacks volume. Regardless of whether or not you choose to implement some or all of the following overlapping strategies, it is important to seek new ways to minimize credit card chargebacks. The most advantageous approach for everyone involved would be a data-sharing system that facilitates collaboration between the merchant, issuer and cardholder. Sharing information with one another is essential to preventing chargebacks. These platforms can provide merchants and issuers with the specific order details they need to help resolve disputes before they become costly chargebacks (device used to make the purchase, a complete description of the product/service, location of the purchase, prior dispute history, etc.), generate compelling evidence to support the legitimacy of the sale and reduce profit leakage. Other steps include:
When to Use a Vendor for Chargeback Representment
While many merchants choose to represent chargebacks in-house, it may be beneficial to let an experienced third-party vendor support these activities. Chargebacks can be costly, so it is important to weigh the benefits of utilizing vendor expertise vs. the cost of staffing and consuming in-house resources on the process. E-commerce is only going to increase, but many merchants are slow to adopt additional security. This could spell real trouble for merchants whose core competency is not chargeback management.