The summer heat may not have faded just yet, but now’s the time to start gearing up for the upcoming holiday season.
Online merchants have a lot to consider in that time. Optimizing fulfillment, logistics, product pages…all are very important considerations heading into this high-volume part of the year. Of course, it’s not enough to focus on maximizing sales potential; holding on to that revenue beyond the New Year should be a key concern, too.
The average merchant has some degree of familiarity with chargebacks. In fact, the Payments 2022 study released in June reveals chargebacks as the indicator most commonly-cited by merchants when analyzing their fraud costs. That said, most merchants won’t know the extent of the damage these payments disputes can cause to a business’s bottom-line, any more than the true source of individual disputes.
In simple terms, a chargeback is a forced transaction reversal initiated by the cardholder’s bank. Regulators first introduced this process more than four decades ago as a consumer protection mechanism. If a cardholder is the victim of merchant fraud or other abuse, the buyer has some legal recourse to recover funds.
Consumer protection is important; we need processes like this in place to protect individuals and ensure trust and confidence in payment cards. The problem is that chargeback processes, which predate the rise of ecommerce, haven’t adapted to the contemporary payments landscape. Today, chargebacks are often abused by cardholders engaged in a practice called “friendly fraud”.
There are countless reasons why cardholders file friendly fraud chargebacks. Buyer’s remorse is a common trigger, as is confusion regarding the merchant’s policies or procedures. It could be as simple a matter as the buyer being unable to recognize the seller’s billing descriptor. Either way, the end results are the same: lost revenue and merchandise, added fees and overhead, and threats to the merchant’s long-term sustainability.
Of course, merchants do have some recourse regarding transaction disputes. Rather than simply accepting chargebacks, they can submit a representment, or literally “re-present” the transaction to the issuer. Of course, this comes with its own challenges; namely, the chargeback reason codes attached to each dispute aren’t reliable indicators.
All chargebacks are produced by one of three primary sources: merchant error, criminal fraud or friendly fraud. Chargebacks911® estimates that between 60-80% of all chargebacks are actually friendly fraud, meaning the reason code produced by the issuer won’t accurately reflect the dispute source.
Post-Holiday Chargebacks are a Compounding Problem
What does this have to do with the holidays, though? After all, fraudulent chargebacks are a year-round problem. That may be true, but merchants can expect to face added challenges in the weeks following the holiday rush.
There’s a routine post-holiday spike in disputes every year. In fact, nearly half of all chargebacks filed in 2017 occurred in the first three month of the year.
It can vary by card scheme and reason code, but cardholders typically have up to 120 days after a transaction date to file a dispute. That said, a large portion of friendly fraud chargebacks are filed between 45-60 days after the initial purchase. Thus, even if this holiday season proves to be a record-setting year, merchants must be prepared to contend with chargebacks, or they could see their sales overturned come January and February.
Consumers will try to return, on average, 15% of goods purchased online during the holiday season. Without the right strategies in place, those returns could devolve into chargebacks. If merchants wait until after the holidays to address the chargeback problem, though, they’ll be too late. Proactive chargeback mitigation needs to be part of the holiday season prep…not the post-game.
Stop Chargebacks Before They Happen
Merchants should take advantage of the slower pace of business at this point in the year by developing and implementing a comprehensive strategy to manage chargebacks. This will pay-off well after the holidays, too. While the first weeks of the new year may be prime time for disputes, chargebacks are still, fundamentally, a year-round problem.
Keeping up with chargeback mitigation best practices will be a helpful—and lucrative—move, well after January passes. The key to achieve this is through a multilayer system of complimentary tools and practices. For example, a strong chargeback management strategy should employ:
- Knowledge-Based Authentication: Fraud mitigation tools like CVV verification and 3-D Secure weed-out fraud attempts by verifying information known to the cardholder.
- Backend Verification Tools: Address verification, geolocation, and velocity limits work simultaneously to provide a more dynamic, detailed profile of the fraud risk represented by each transaction.
- A Complete Return Policy: The merchant’s return rules should be comprehensive and consistent; flexible, yet clear regarding what is and isn’t acceptable for product returns.
- Employee Training: Provide regular training for customers to spot the warning signs of criminal fraud and other suspicious activity.
- Responsive Customer Service: Buyers should have round-the-clock access to live, knowledgeable customer assistance to answer questions and resolve problems.
- Detailed Product Descriptions: Merchants should create in-depth overviews of products, illustrated by high-resolution images, that set reasonable customer expectations for products.
Of course, the tools and practices listed above are only part of the strategy. These behaviors will go far to mitigate criminal fraud and merchant error risks. Friendly fraud, however, is a post-transactional threat source; it doesn’t show any signs of fraud until well-after the sale. Thus, the only effective solution for friendly fraud is to engage in tactical representment.
Merchants can have a tough time applying tactical representment, though, as it requires substantial data insight. Couple that with the complex rulesets that may vary based on card scheme, location, or product vertical, and it’s no wonder so many merchants regard chargebacks as too much work to bother with.
In these cases, merchants should partner with a chargeback mitigation service. This would be the best solution to contend with the demands of chargeback management, before andafter the holiday rush.