Chargeback Prevention

FAQ: Ethoca Chargeback Alerts

Ethoca Prevention Alerts_Blog Image

Merchants should always be looking for ways to reduce the number of chargebacks they get.  Whether they're legitimate or not, excessive chargebacks can get a merchant cut off from their payment processing company.  Even simple disputes that a merchant could easily handle directly with the customer, if given the opportunity, can turn into chargebacks that have a lasting negative effect on a business.

Ethoca is a company that works to reduce chargebacks by intercepting cardholder disputes at their point of origin with the issuing bank, sending a chargeback prevention alert to the merchant, and giving them a chance to resolve the dispute before it gets recorded as a chargeback.

What Are the Effects of Chargebacks?

The three major credit card networks (Visa, MasterCard, and American Express) track the ratio of chargebacks to transactions incurred by the merchants they work with.  

If the ratio crosses a certain threshold, the merchant is considered "high-risk," and their acquiring bank may take various actions, including closing their merchant account, restricting their monthly processing volume, holding funds in reserve, and even listing them in a Terminated Merchant File (TMF). 

This last step can make it harder for the merchant to open new accounts with other payment processing companies.  Acquiring banks may even start taking these measures before a merchant reaches their threshold if it looks like they're trending in the direction of becoming high risk.

The thresholds may vary depending on the type of merchant.  Smaller stores might be treated differently than big online retailers, for instance.  Either way, merchants whose accounts are closed due to exceeding their chargeback ratio, and who end up in a TMF, may be unable to open a new merchant account with a different bank, leaving them with expensive, high-risk payment processing companies as their only option, if they want to keep doing business.

Unfortunately for merchants, "friendly fraud" chargebacks are becoming more common, as customers initiate chargebacks with their banks for the sake of convenience, rather than attempting to resolve their issue with the merchant directly first.  The customers may not realize it, but these chargebacks can have serious consequences for merchants who lack any type of chargeback protection.

What is Ethoca?

Founded in 2005 and based in Toronto, Ethoca is a global provider of technology that enables e-commerce companies to prevent fraud, recover lost revenue, and prevent chargebacks.

Their network allows them to bring cardholder problems to merchants' attention in real time, sending chargeback prevention alerts that essentially hit the "pause" button on the chargeback process, giving merchants the chance to resolve issues without involving the acquiring bank (as seen below).

Ethoca Chargeback Alerts
 Why Are Prevention Alerts Beneficial?

The most important benefit of chargeback prevention alerts is that they give merchants a chance to deal with customer disputes before they count as chargebacks in the eyes of the card networks and acquiring banks.  

By issuing a refund directly, in response to a prevention alert, the merchant's chargeback ratio remains unchanged.  If a merchant gets a prevention alert for a dispute that they believe is fraudulent or invalid, they can decline to issue a refund, and the request will proceed as a chargeback.  The merchant can then dispute the chargeback if they wish.

Ethoca charges a fee for every alert they issue, regardless of how the merchant opts to deal with the alert.  While fees for chargeback prevention alerts can add up, they can ultimately end up saving merchants lots of money, by helping them avoid the hassle and expense of having their merchant account shut down because they exceeded their chargeback ratio threshold.

Is Ethoca the Only Company That Provides These Notifications?

The other major company that provides prevention alerts is Los Angeles-based Verifi.  Both companies have a large network of issuing banks that will tip them off to cardholder disputes before they become chargebacks, and they are constantly working to expand their networks and bring more major banks into the fold.  There is considerable overlap between both networks, but there are differences.  Ethoca covers more Canadian, European, and Asian banks, while Verifi's network has more banks based in the United States.

Both companies charge a fee any time an alert is sent out, and they both require merchants to take action on an alert within 24 hours of receipt.  If an alert isn't handled within that time frame, it goes through the full chargeback process, and the merchant is still required to pay the alert fee.

Signing up for both Ethoca and Verifi gives merchants the broadest possible range of bank coverage, but because of the overlap between networks, merchants will get lots of duplicate alerts and will have to pay fees to both companies.

Why Let a Chargeback Management Company Handle Alerts for You? 

  1. Working with a chargeback management company who is an authorized reseller of Verifi and Ethoca prevention alert programs means that you have the coverage of both Verifi and Ethoca.
  2. When you hire a chargeback management company, you have a dedicated team that responds to chargeback prevention alerts within the required time frame.  This way you never have to worry about failing to respond in time—whereas, when a merchant signs up for alerts directly with the networks, the burden of resolving the alerts falls on the merchant.
  3. Some chargeback management companies provide an intuitive dashboard, where you can manage the alerts from different networks in one portal, versus logging in to multiple systems to track your prevention alerts.
  4. A chargeback management company may even offer a 100% chargeback prevention guarantee when a prevention alert is handled.  This means if an alert, after issuing a refund, still turns into a chargeback, the management company will refund 100% of your alert fee.
  5. Lastly, a chargeback management company may charge the same fee that is charged by the alerts networks, plus you get all of the additional benefits listed above.

How Soon Can the Alert Network Intercept and Prevent a Chargeback?

  • New Merchant:  45 – 60 days
    (Haven’t processed any transactions before)
  • Existing Merchant:  20 – 30 days
    (Never enrolled in a prevention alert network before)
  • Existing Merchant:  No delay
    (Previously enrolled in prevention alerts, but switching providers)

What Percentage of Chargebacks Can Be Prevented by Alerts? 

The percentage of chargebacks that can be intercepted by the prevention alert networks depends on these factors:

  1. Transaction Count (the more transactions, the better the coverage)
  2. Customer Bank Location (United States customer base has better coverage than overseas)
  3. Years in Business (established businesses can have better coverage than new merchants)

Here are some estimates based on our own internal data analysis:

Service/Product

Verifi

Ethoca

Physical Goods

21%

17%

Digital Goods

41%

30%

Digital Service

17%

33%

Subscription Industry

19%

14%


What Is the Cost of Prevention Alerts?
 

The cost of prevention alerts varies, based on your individual alert count.  Generally speaking, the cost ranges from $35 to $40, per alert received.

What Do I Need to Get Started?

To have your merchant accounts successfully enrolled in the prevention alert network, you must provide:

  1. Merchant/Business Name
  2. Official Registered Address for the Business
  3. Merchant Account Descriptor (customer credit card statement name)
  4. Merchant Account Number (the ID provided by your payment processor)
  5. Access to Merchant’s Sales System (to issue refunds, as well as resolve alerts)

Are Prevention Alerts the Only Option I Have for Preventing Chargebacks? 

Prevention alerts may be helpful, but, in our opinion, they are only a short-term solution.  

The best course of action is to address the root cause(s) of your chargebacks.

Participating in prevention alerts can become costly over time.  Here is how the cost of preventing a chargeback, through prevention alerts, breaks down:

Transaction Amount

$100.00

Cost of Goods

$25.00

Fulfillment Costs

$8.00

Marketing Cost

$25.00

Processing Fee

$3.50

Operations Fee

$10.00

Prevention Alert Fee

$40.00

Total Cost

$211.50

(Over 2x the cost of the Transaction Amount)


By addressing the real causes of chargebacks, you will save your company money, in the long run.  Follow these five basic steps to reduce the occurrence of chargebacks:
 

  1. Offer realistic expectations for your products and services

  2. Provide excellent customer service by responding to phone calls and emails as soon as possible

  3. Provide customers with terms of service and refund terms, before purchases are made

  4. Make it easy for customers to get in touch with customer service, or to cancel their order(s) or subscription(s)

  5. Focus on the true causes of chargebacks, then deal with any internal issues that trigger them 

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