Fashion Chargebacks and Fraud
The fashion industry serves everyone from the trendsetters in haute couture to the most resolute advocates of business casual, and ecommerce has made it possible for small boutiques and upstart designers to sell to the entire global marketplace.
But there’s one very unglamorous element to the fashion industry: the high levels of fraud and chargebacks faced by merchants who sell clothing. Without an effective plan for dealing with these issues, merchants may suffer significant revenue loss and other harmful consequences. What do fashion and apparel merchants need to know about fraud and chargebacks in their industry?
Some people shop for clothes as a form of recreation, others may shop only when they absolutely need to, but either way, we all end up as customers of the fashion and apparel industry. Keeping people clothed is a major driver of economic activity, and ecommerce is a big part of it, comprising 29% of all retail clothing sales in the U.S. last year.
Unfortunately, the high transaction volume of online fashion is precisely what attracts fraudsters, giving them a target-rich environment where the merchants are often too distracted with the demands of their business to give suspicious orders close scrutiny.
To make matters worse for fashion merchants, their customers often expect easy and flexible return policies, which fraudsters will often attempt to exploit. While merchants may have to accept a certain amount of returns as an unavoidable cost of doing business, the same does not go for fraud or chargebacks.
When lost revenue, overhead, and fees are accounted for, chargebacks can cost more than double the amount of the original transaction.
Most worryingly, each chargeback causes a merchant’s chargeback rate to go up. When that rate exceeds 1%, merchants are in danger of being penalized by their acquirer or payment processor, and can even have their merchant accounts shut down.
What is a Fashion Chargeback?
One thing to keep in mind if you’re searching for information about fashion and apparel industry chargebacks is that the term “chargeback” can mean something very different in a context of wholesale orders and inventory management.
When a retailer receives a shipment of products from a wholesaler, they may find that some of the items are not in saleable condition. This may be for obvious reasons like damage or poor quality, but even seemingly minor issues can cause problems for retailers.
This is especially true for fashion retailers, who may find cause to reject items for incorrect price ticket placement, the wrong carton size, erroneous UPC codes, and other details.
The process of obtaining reimbursement for these items that cannot be sold is often called a “chargeback.” This species of chargeback can cause lots of headaches for fashion industry businesses at every link in the supply chain, but it has nothing to do with the credit card chargebacks that occur between merchants and their customers.
What Types of Chargebacks Affect Fashion Merchants?
There are three basic categories of credit card chargebacks.
True fraud chargebacks happen when a fraudster places an unauthorized transaction with a stolen card and the cardholder disputes it. These chargebacks cannot be fought after the fact, they can only be prevented ahead of time with anti-fraud tools and strong cybersecurity practices.
Merchant error chargebacks result from avoidable errors caused by the merchant. For example, the merchant shipped the wrong product, or shipped a defective product, and never provided the customer with a refund.
Merchant error disputes may be somewhat subjective in nature, and sometimes merchants can fight these chargebacks and win. The best strategy, however, is to avoid the missteps that lead to merchant error chargebacks in the first place.
Friendly fraud chargebacks show up disguised as true fraud or merchant error chargebacks, but they’re really just illegitimate disputes based on false claims from the cardholder.
Sometimes friendly fraud results from genuine confusion or miscommunications, but a lot of it is done intentionally as a form of cyber-shoplifting. Merchants should always fight friendly fraud chargebacks with compelling evidence that disproves the cardholder’s claims.
Why Do Fraudsters Target Fashion Merchants?
Perpetrators of true fraud are drawn to high-volume merchants like clothing retailers because the large overall number of transactions and customers gives cover to fraudulent activities that might stand out as anomalous or suspicious for a lower-volume merchant.
Some clothing styles and brands also retain a high resale value, which makes them a smart buy for fraudsters who need an easy way to “launder” some stolen credit card numbers into actual cash.
Apparel merchants understand that ecommerce customers often have to try clothing on at home before they can be sure it fits or looks satisfactory, which means that a flexible and generous return policy is a must if you want to retain loyal customers. Fraudsters exploit this by engaging in wardrobing and other forms of refund fraud.
Wardrobing is when a customer purchases an item—in this example, an article of clothing—wears it once, perhaps to a party or some other special event, and then returns it for a full refund. If the merchant suspects wardrobing and refuses to give a refund, there’s a good chance the customer will try to get a chargeback instead.
It’s also not uncommon to see more elaborate refund fraud schemes. Some fraudsters will swap return shipping labels to generate tracking information that makes it look like they sent a return back to the merchant. The merchant provides the refund, but the nonexistent return shipment never arrives. Instead, the fraudster keeps the money and the product.
Like any other merchant, fashion merchants can reduce their fraud and chargebacks by analyzing their data to determine the root causes of these problems. Once identified, they can decide which anti-fraud tools to deploy, what operational processes need to be revised, and what else they might need to do in order to protect themselves.
Two pieces of advice are evergreen: provide excellent and accessible customer service around the clock, and carefully record and maintain any transaction documents or correspondence you might someday need to provide as compelling evidence for chargeback representment.
It’s also important to remember that help is always out there if you need it. The right chargeback management firm can help you devise a strategy to get back on track when fraud and chargebacks become too much to manage.