The Chargeback Battle Has Just Begun

The hustle and bustle of holiday shopping season is in full-swing, and with it comes the threat of a spike in chargebacks. While the excitement of increased ecommerce sales—to the tune of a predicted $119.99 billion—may glisten in merchants’ eyes, they should not forget what is lurking around after the holiday excitement calms. This increased ecommerce sales volume brings an increase in chargebacks, cutting into merchants’ profits and taking a bite out of the bottom line.

Friendly fraud is a top offender during the holidays, where consumers claim they did not receive an item that they legitimately purchased. Friendly fraud comes in two flavors: intentional and accidental. With the former, a customer intentionally lies about not receiving an item (or says they received a damaged or wrong item) to receive a refund from their credit card issuing bank. Sometimes this happens when a customer is dissatisfied with a merchant’s return policy and finds it easier to obtain a refund from the bank, bypassing merchant.

Accidental friendly fraud occurs when a customer becomes confused about a purchase, perhaps not recognizing the billing descriptor on his or her monthly statement. In other cases, a relative may have borrowed the card and not told the cardholder about the purchase. In any event, the customer is not intentionally trying to defraud the merchant, but simply doesn’t recognize the charge.

In both instances of friendly fraud, the merchant loses. Chargebacks are expensive and can cause long-lasting problems for merchants who are not adept at managing them. The situation is aggravated by the fact that chargebacks continue to roll in long after the holiday bustle dies down. Cardholders have up to 180 days in some cases to dispute a charge. Once a dispute is initiated, the chargeback cycle can take several months before a merchant is notified.

Merchants who suprass a chargeback ratio of 1% risk being placed on a chargeback monitoring program by one of the card brands. Monitoring programs require merchants to create and abide by a chargeback management plan that will reduce their chargeback ratio within a set timeframe. Those that are unable to reduce chargebacks face steep fines in the neighborhood of $25,000 for reviews imposed by card brands. Those that are unable to lower chargebacks—or who breach the 2% ratio—face merchant account termination.

These fines, fees, and penalties are in addition to the baseline costs that merchants face for instances of fraud. According to the 2018 True Cost of Fraud Study, each dollar of fraud loss actually costs merchants $2.94, which is a 6% increase over last year.

Fighting chargebacks requires end-to-end considerations and fraud controls. Merchants looking to beef up their fraud prevention for the holidays should consider the following:

• Use CVV2 to authenticate online transactions

• Use AVS to verify credit card data against the issuer’s billing information for online transactions

• Implement device fingerprinting

• Implement shipping verification

• Implement fraud controls that use geolocation data

• Email, Phone, or Chat Support Correspondence

• Implement chargeback notification tools

• Clearly articulate methods of contact on the website in an easy-to-find manner and post working and manned phone line numbers

• Utilize intelligent chat programs

• List a customer support email address or contact form

• Use order confirmation emails to “remind” customers of their purchase and all relevant details and also include customer support contact information within the email

• Use real-time emails to communicate any issues or delays in shipping or in cases of backordered items

• Use clear billing descriptors (what a customer see on their monthly statement) including a contact number and DBA name

• Have a clear return policy and be sure to link to it on your websites and within emails. Also include on receipts.

Chargebacks can be the Grinch’s revenge on successful holiday sales, but merchants have recourse. Take action to prevent unnecessary dispute and work with a trusted payment processor who can advise on the best fraud solutions that can be tailored to your unique needs. A payments professional can help merchants map out the right combination of solutions to keep legitimate sales flowing while combating bad actors.