Chargebacks: No longer a cost of doing business
The cost of chargebacks and fraud mitigation keeps rising. At the same time, competition among merchants in the ecommerce sector is also increasing. Some analysts report that the cost of customer acquisition has gone up as much as 30% in recent years.
In a business climate like this, merchants cannot afford to incur unnecessary expenses or take a passive stance toward problems and inefficiencies that are costing them revenue. For some companies, it’s a given that chargebacks are just an unavoidable cost of doing business.
They could not be more wrong.
***You may view our PaymentsEd webinar for this topic here: https://hubs.ly/H0kHsPc0
Chargebacks strike at the very heart of a merchant’s source of revenue, and the damage they can do goes far beyond the dollar value of a single disputed transaction. Chargebacks incur costly fees, endanger your relationship with reputable payment processors, and can cause you to waste time and labor that would be better spent on your actual business activities. In some circumstances, a chargeback an end up costing up to three times the original transaction amount.
The silver lining to chargebacks is that merchants who take the trouble to understand why they’re happening and address those root causes can realize significant improvements to their business operations and their bottom line.
Find Out Who’s Causing Your Chargebacks
Any cardholder who makes a purchase with a credit card is entitled to contact their bank to dispute a charge and request a chargeback. They must have a valid reason for doing so, but the burden of proof in a chargeback is on the merchant—if the cardholder’s reason is invalid, it’s up to the merchant to prove that’s the case.
Chargebacks can be sorted into one of three broad categories:
- True Fraud from cybercriminals who use stolen credit cards to make purchases. These typically represent 5% to 10% of a merchant’s chargebacks.
- Friendly Fraud from legitimate customers who decide, after making a purchase, to dispute the charge. Some friendly fraud is intentional, but cardholders may do it out of ignorance or impatience. As much as 60% to 80% of chargebacks may be attributable to friendly fraud.
- Merchant Error chargebacks result from mistakes made by the merchant—incorrect payment processing, products not arriving as advertised, customer service mishaps, and the like. About 10% to 20% of chargebacks are related to merchant error.
One of the key aspects of chargeback analytics is identifying the source of your chargebacks so you can see which of these categories is proving to be the biggest issue for you. Each of these chargeback categories has solid strategies for mitigation, but they’re all quite different.
Why Don’t More Merchants Fight Back?
Why is the idea that chargebacks are a cost of doing business so widespread? Possibly because there are a lot of myths and misconceptions about chargebacks floating around. There is a learning curve to fighting chargebacks effectively, and when merchants find themselves frustrated by the process, it’s easier to just believe the myths.
Some merchants believe that fighting chargebacks will give them a bad reputation with their customer base. It’s true that customers will be rightly upset when merchants fight legitimate chargebacks, but when you fight the illegitimate chargebacks, you’re not going up against your customers—you’re fighting back against fraudsters.
Other merchants may accept that chargebacks can be fought and won, but insist that it’s too expensive for them to do so. They may be half right—if you have a very high sales volume, building the in-house infrastructure to deal with chargebacks may not be feasible. In cases like this, it makes sense to hire a chargeback management firm.
Fighting chargebacks gives merchants a competitive advantage over merchants who let them slide. When you fight chargebacks, you’re reclaiming revenue that would otherwise be lost, sending a signal to fraudsters that you’re no easy mark, and best of all, you’re gaining deep insights into any problems your customers are having with your business.
Can I ignore chargebacks?
Ignoring chargebacks means you’re ignoring your customers’ issues. For every customer who files a chargeback, ten other customers have the same issue but simply leave and never come back. You’ll never get the opportunity to ask them why they’re leaving. The chargebacks, however, will always tell you a story you can learn from.
And what about fraudsters? When you don’t fight back against their chargebacks, they learn that they can keep hitting you with fraudulent charges and get away with it.
Even the card networks directly incentivize responding to chargebacks by levying fees against merchants who don’t either explicitly accept or contest them.
What are chargeback analytics?
Chargeback analytics are the key to a successful chargeback defense strategy. Only by analyzing the data generated by your chargebacks can you identify their sources and take the proper steps to stop them in their tracks.
The best protection against true fraud is tools and software that can screen out and identify fraudulent transactions before they can be finalized. Chargeback analysis can tell you if those tools are actually working or not. With a good fraud tool up and running, your true fraud chargebacks should be at 5% or below—if that’s not the case, it’s time for a talk with the tool’s developers.
Analyzing notifications from your bank can help you interpret the early warning signs of friendly fraud. One example would be a high number of retrieval requests. These often result from cardholders reporting an unrecognized charge to their bank. When you see a lot of retrieval requests, it may indicate that the merchant descriptor showing up on customers’ bank statements is confusing.
The timing of chargeback requests can reveal a lot about how your internal procedures are leading to chargebacks. A chargeback request filed after you’ve already promised a refund to a customer may be a sign that you’re taking too long to process refunds, or communicating about them poorly. Chargebacks related to products that arrived damaged may point to problems with your fulfilment or manufacturing.
If you’re getting a large number of chargebacks from a single source of web traffic, you may have hooked up with a bad marketing affiliate.
When you use chargeback analytics to identify the root causes behind them, you can begin to put together a cohesive narrative of the problems your customers are having and take the correct steps to fix them.
For persistent and challenging chargeback problems, professional chargeback management may be the answer. Experienced firms will know specific strategies for dealing with different issuing banks, and will be able to help you assemble the best compelling evidence to submit with your representments. Then, when the fighting is over, they’ll be able to help you implement changes and improvements to your business operations that will make your high chargeback ratio a thing of the past.
With fewer chargebacks, you’ll keep more revenue and avoid expensive fees, and the improvements you make will have lasting benefits to your business as a whole. When fighting chargebacks gives you so many advantages, why would you ever want to ignore them?