Chargeback Prevention

Weighing the Benefits of Chargeback Automation

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Merchants know they can’t afford to ignore chargebacks, but that doesn’t mean that figuring out what to do about them is an easy decision. Handling chargeback management in-house often seems like the most cost effective method, but it can be a real drain on staff time and resources.

One compromise between in-house and outsourced chargeback management is chargeback automation, a software solution that uses a rules-based formula for determining how to respond to chargeback alerts and notifications. How does chargeback automation work, and what are the pros and cons of this approach to chargeback management?

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As chargebacks have grown to become a costly and recognizable problem for merchants, especially in the ecommerce sphere, more and more providers have begun offering ways for merchants to unload some of the burdens of chargeback management.

Accepting chargebacks as an unavoidable cost of doing business just isn’t an option—with fees and overhead factored in, the typical chargeback ends up costing the merchant more than twice the amount of the original transaction.

More importantly, ignored chargebacks frequently turn into excessive chargebacks, and that can get you kicked off your payment processing platform or even blacklisted from opening new merchant accounts.

Managing chargebacks can take up a lot of a merchant’s time. Every time you receive a chargeback, you need to investigate it enough to decide whether to accept liability or fight it by representing the charge. If you do go the representment route, you need to put together compelling evidence and a cover letter.

There are also retrieval requests and chargeback alerts that must be responded to promptly to avoid potential chargebacks, and if you’re really serious about stopping chargebacks, you need to track and analyze your chargeback data and use it to inform your prevention strategy going forward. It’s a lot for a small merchant to take on.

What is Chargeback Automation?

A chargeback automation solution is a set of software tools that allow merchants to make automatic, rules-based responses to their chargeback activity. The objective is to save merchants from having to spend time and resources on manually responding to chargebacks by determining and providing the optimal response for any given chargeback scenario.

These are some of the actions that might be handled by chargeback automation software:

  • Responding to chargeback alert services
  • Issuing refunds during the pre-dispute phase and notifying relevant parties
  • Determining whether to accept or fight a chargeback
  • Selecting compelling evidence for representment
  • Submitting representment
  • Cancelling future billings after a dispute
  • Blocking friendly fraudsters from making future purchases
  • Compiling reports on your chargeback activity

Download the eGuide, 4 Reasons to Hire a Chargeback Management CompanyThe rules that the solution uses to make its determinations may be provided entirely by the merchant, or may be informed and updated by processes such as machine learning to improve over time.

Most chargeback automation solutions will integrate with your CRM and other systems to provide as seamless an experience as possible.

What are the Benefits of Chargeback Automation?

The foremost benefit of chargeback automation is that it reduces manual processes, saving the merchant time, labor, and the costs of assigning staff to handle chargeback management. This can be especially helpful for merchants with a high transaction volume, or fast-growing merchants who are having difficulty scaling up their chargeback management efforts.

Chargeback automation can also be used very effectively in combination with opt-in chargeback alert services that give merchants the chance to resolve disputes by issuing refunds before the dispute is escalated to a chargeback.

To gain the full advantage of these services, you have to respond quickly and consistently to alerts, so having automation here can eliminate the chances of missing an alert or responding too late.

It’s also very useful to automate some of the follow-up activities after a chargeback, such as flagging the customer’s account in your CRM to identify them as a friendly fraudster.

Because these activities do not directly relate to chargeback representment or revenue recovery they can be easy to deprioritize, but they are important for preventing double refunds, future disputes, and other issues.

What are the Drawbacks of Chargeback Automation?

There are several different chargeback automation solutions out there, each with their own strengths and weaknesses to evaluate. Speaking generally, it can be risky to turn critical processes such as accepting liability and submitting representment over to automated software solutions.

Not every dispute will fit neatly within a rules-based model, and there will always be cases where human intelligence is needed to make the best choice of whether or not to fight a chargeback and what argument and evidence should be brought to bear in doing so.

Chargebacks tend to be a dynamic problem, with root causes that can shift with changes to the merchant’s policies and procedures, new trends in fraud, and other unpredictable factors. While automation can helpfully supplement both in-house and outsourced chargeback management, there’s no such thing as a set-it-and-forget-it solution for chargebacks.

One of the biggest drawbacks of automating chargeback representment end-to-end is lower recovery rate and lack of dispute intelligence to identify root cause of chargebacks. These two components are very crucial to obtain a positive ROI when considering representment and device strategies to proactively prevent refund.

Chargeback automation should be reviewed regularly by the merchant or their chargeback management team, and strong manual processes should always be in place for handling critical matters related to representment, revenue recovery, and chargeback data analytics.

Chargeback Gurus recommends merchants to use a semi-automated representment approach to overcome the challenges faced with full automation products.

Conclusion

Merchants have a lot of third-party options for dealing with fraud and chargebacks, but in order to choose the most effective ones for your business, you have to know the root causes behind your chargebacks. Some merchants may find that they deal with a high volume of predictable chargebacks that can be safely dealt with in a consistent, automated way.

Others may find that an over-reliance on automation may lead to a lower success rate in chargeback representment. Either way, merchants still need to decide whether to direct their own chargeback management strategy or whether the situation calls for the advice of outside experts.

The key question with any chargeback solution is whether or not you’re getting a good return on your investment. In-house management isn’t saving you any money if you’re too busy to stop and fight winnable chargebacks, and an outsourced solution can be worth every penny if it’s succeeding at lowering your chargeback ratio and recovering your revenue.

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